Stocks are having a hard time picking a direction. Two weeks ago we saw a widespread rally with the U.S. market delivering its biggest one-week gain since March. This past week the market reversed lower producing its biggest one-week loss since March. It wasn't just the American market. Europe, Japan and Chinese markets all closed lower for the week.

Disappointing economic data out of Europe and China fueled new fears over a global economic slowdown. A sell-off across the commodity space isn't helping. All of the major U.S. indices fell more than -2% for the week. Transports were down -2.6%. The semiconductor index fell -3.6% for the week. Banks were down -1%. The normally strong biotech industry plunged -4.74% but it's still up 22.7% year to date. Money flowed into the bond market looking for safety and the yield on the U.S. 10-year note dropped to 2.27%.

Earnings

In last week's commentary I noted that according to FactSet research the five-year average is 73% of the S&P 500 companies normally beat analysts earnings estimates but only 57% beat the revenue estimate. Thus far with 185 S&P 500 companies having reported this Q2 earnings season, 77% have beaten the earnings estimates. That's due to serious cost cutting and widespread stock buyback programs. According to Bespoke Investment Group only 51% have beaten the revenue estimate this season. Bespoke also notes that going back to 1998 the long-term average is 60% of companies beat the revenue estimate.

Investors seem to be focused on the revenues misses instead of the earnings beats. It doesn't help that we have seen some high-profile companies miss expectations on both the top and bottom line. Currently Wall Street is expecting Q2 earnings to fall -4.1% from a year ago and a -4% drop in revenues. It will be the worst quarter for earnings growth since 2009.

Unfortunately it's going to get a lot worse when companies in the oil industry start reporting. Crude oil has been falling and that pushed oil stocks to a -4.74% decline last week. Oil services fell -2.0%. Year to date the two groups are down -10.7% and -16%, respectively. Energy stocks are expected to report the weakest earnings growth (a.k.a. declines) than any other group this quarter.

Commodity Sell-off

Crude oil prices fell -5.75% for the week. Oil is down -10% year to date and closed below $48.00 a barrel on Friday. U.S oil inventories continue to build with a +2.5 million barrel jump last week and near an 80-year high. Natural gas inventories are also near record highs. In spite of this surplus the weekly active rig count bounced +21 to 659 rigs. There has been some speculation that some companies are pumping oil at a loss because they need the cash flow.

Oil isn't the only commodity in sell-off mode. Silver fell -1.25% for the week. Gold was down -3.1%. Both silver and gold are at or near five-year lows. Copper dropped to six-year lows. Word on the street is that the commodity plunge has sparked some serious margin calls for both individual investors and fund managers. When you can't sell enough commodities to cover your margin call you start selling stocks.

The CRB commodity index consist of 19 commodities including aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, lean hogs, cattle, natural gas, nickel, orange juice, silver, soybeans, sugar, unleaded gas, and wheat. The CRB index has fallen to multi-year lows.

Chart of the CRB index

Economic Data

Most of the economic data for the U.S. was related to real estate. Two weeks ago we learned that building permits surged to an eight-year peak. This past week the sale of existing homes surged +3.2% to an annual rate of 5.49 million homes, which is an 8 1/2 year high. It sounds like the real estate market is soaring but it could see a dip ahead if new home sales are any clue.

Last week the Commerce Department reported that new home sales dropped -6.8% in June to an annual rate of 482,000. They revised May's new home sales lower from 546K to a 517K pace. This is the second monthly decline in a row. However, I wouldn't get too worried yet. The sale of new homes only accounts for 8% of the real estate market. Plus, even with the declines, the sale of new homes is still up +18% from a year ago.

There is a concern that buyers are suffering from price fatigue. The price of homes has been surging for the last two years.

In other news the weekly initial jobless claims fell to 225,000. That's the lowest reading since 1973.

Overseas Economic Data

China has generated a lot of concern lately and it's impacting the commodity market. China is the second-largest economy in the world and the biggest buyer of commodities on the planet. Officially the Chinese government says their economy is growing at +7.0% a year. Most analysts believe the real number is a significantly lower and the latest economic report for China seems to support the slowdown thesis.

The HSBC Flash PMI report has been renamed and is now called the Caixin/Markit China PMI report. This Caixin PMI survey fell to 48.2 in July. Analysts were expecting a rise from 49.4 to 49.7. Numbers below 50.0 suggest economic contraction and July is the fifth month in a row beneath 50. It's the lowest reading since April 2014 below all the estimates surveyed by Bloomberg. In a separate report freight rail traffic in China fell -12% in June. According to Reuters a survey of 420 Chinese manufacturing firms revealed that output, new orders, and export orders had all declined. China's slowdown seems to be getting worse and that means the sell-off in commodities still has further to fall. It also means we could see another round of headlines from China regarding new government stimulus soon.

Economic data out of Europe was also disappointing. The Eurozone said their manufacturing PMI for July fell from 52.5 to 52.2, which was below estimates. Germany's manufacturing PMI for July slipped from 51.9 to 51.5. France's PMI dropped from 50.7 to 49.6. Numbers below 50.0 indicate economic contraction. The region seems to be slowing down.

Greece

Thankfully we enjoyed another week where Greece was not a major headline. On Thursday the Greek Parliament voted in favor of the second set of reforms that their creditors required before the next step in the third bailout could continue.

The latest round of negotiations were supposed to begin on Friday in Greece but were delayed due to security concerns. Greece cannot find a location safe enough to carry out the next round of talks. There are certain segments of the Greek population that hate the ECB, EU, and IMF (a.k.a. the Troika) so much that officials fear for the safety of the Troika representatives.




Major Indices:

The big cap stocks had a rough week with the S&P 500 falling -2.2%. The index is down four days in a row and it sliced through several areas that should have been short-term support. If the S&P 500 doesn't bounce from current levels (near 2,080) the next support level is probably 2,050 and below that the March and July lows near 2,040. Year to date the S&P 500 is only up +1.0%.

chart of the S&P 500 index:

The NASDAQ composite is only down three of the last four days but it fell -2.3% for the week. The nearest support levels look like they could be the 5,050 area, the 5,000 level, and the July low near 4,900.

The NASDAQ is suffering from a lot of volatility among its high-priced components. A huge rally in Amazon.com (AMZN) on Friday morning was offset by a big drop in Biogen (BIIB).

Year to date the NASDAQ's gain is +7.4%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index looks the weakest among the major indices. The $RUT lost -3.24% for the week and closed below its early July lows. The mid-July bounce essentially failed at its prior trend line of support. If the $RUT doesn't bounce near 1,220 and its 200-dma it could signal a much deeper correction. The 1,200 level has been support in the past but I am skeptical it will hold this time.

Year to date the $RUT is only up +1.7%.

chart of the Russell 2000 index



Economic Data & Event Calendar

We have a handful of reports this week including another look at Q2 GDP growth in the U.S. However, the two-day FOMC meeting will be the big event. No one expects the Fed to adjust rates so the focus will be on the Federal Reserve's statement. Investors want clues on when the Fed will raise rates next. Fed Chairman Janet Yellen would like to raise rates this year but economic data has recently took a turn for the worse.

- Monday, July 27 -
Durable Goods Orders

- Tuesday, July 28 -
Case-Shiller 20-city home price index
Consumer Confidence
Richmond Fed manufacturing survey

- Wednesday, July 29 -
Pending home sales
FOMC meeting (end of two-day meeting)

- Thursday, July 30 -
U.S. Q2 GDP estimate
Japan's Consumer Price Index (CPI)

- Friday, July 31 -
Eurozone Consumer Price Index (CPI)
China manufacturing PMI
Employment Cost Index
Chicago PMI data
University of Michigan Consumer Sentiment survey

Additional dates to be aware of:

Sept. 7th - Markets closed for Labor Day holiday
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

Looking ahead the week in front of us will be about two things: earnings and the FOMC meeting. When I say earnings I mean a lot of earnings. There are almost 1,300 companies reporting earnings in the next five days. That might be a record. The high-profile report to watch will be Facebook's on July 29th.

Investor sentiment remains subdued. The weekly survey showed bullish sentiment rose +1.7% to 32.5%. That's the 17th week in a row that bullish sentiment has been under the long-term average of 38.8%. Almost 42% of investors surveyed are neutral on the market. History suggests that long periods of high neutral readings and below average bullish readings tend to be followed by bullish periods in the market (6 to 12 months out). However, this is not a very accurate signal and should not be used as a timing tool.

We need to keep in mind that the calendar is against us. Traditionally August and September are two of the worst months of the year for stock market performance. With the global economy slowing down and corporate earnings in decline I would not be in a rush to buy stocks right now.

According to Ralph Acampora, the unofficial godfather of technical analysis, the clock is ticking for stocks. Ralph spoke to CNBC last week and noted how the S&P 500 has been stuck churning sideways for months. He believes that if the market doesn't make a new high soon it could portend a correction in the relatively near future. The S&P 500 is virtually unchanged from March and the index hasn't seen a new high since May 21st.

Stocks are certainly overdue for a correction. Technically a correction is a pullback of -10% or more. A bear market is a drop of -20% or more. It's been almost 1,400 calendar days since the S&P 500 had a -10% pullback. The index almost hit correction territory in September-October 2014 when it fell -9.8% before bouncing.

~ James