Hidden Earnings Punishment

Written by Dennis Slothower
Posted May 12, 2018

Stocks Gently Rise on Low Inflation

The stock market held onto recent price gains through the first full week of May, after the Labor Department reported that inflation was tamer than expected. In the month of April, consumer prices showed a small increase, with the consumer price index rising by 0.2% compared to expectations of 0.3%.

Remember, this popular measure of inflation excludes energy and food prices, and energy prices have been spiking heading into summer. So while appliances and other “core” items only inched up by 0.1%, the real pocketbooks of Americans are being challenged by rising fuel prices.

Despite the “official” softening for core inflation, Michael Pearce, senior U.S. economist at Capital Economics, said the Federal Reserve will look aside.

"Even so, core inflation on the Fed's preferred PCE measure has still accelerated faster than Fed officials anticipated just a few months ago, which will keep the Fed on track to raise interest rates again in June," Pearce said.

But with this lowered inflation outlook, traders presumed that the Federal Reserve still might slow down the interest rate hike march it has been on. Sorry folks, this is not enough for the Fed to even blink, let alone change its quantitative tightening plans. But on Thursday, it was enough to hold stock prices steady in short-term overbought conditions.

Notice the short-term indicators we monitor:

It’s been a while since we’ve reviewed these indicators, so let’s go over them.

The top of the chart shows a MACD indicator, with the value right at the top of its oscillation this year, suggesting that prices are short-term peaking here. The center main chart shows the S&P 500 prices with a grey-blue Bollinger band around these prices. Note that right now prices are touching the top of the upper Bollinger band line — and each time it has done so since February, prices have reversed and gone down — another indication of short-term overbought conditions.

The Stochastic indicator is one of my favorites for showing abnormal conditions for prices. Right now, the Stochastics are pegged very near the high limit at 99.81%. This indicator can only go to 100%, so clearly traders should be wary in the coming weeks of some price correction.

Another very reliable indicator is the Relative Strength Indicator (RSI). This section of the chart shows that since the February pullback, the RSI has oscillated up to 70% and then drifted back down along with prices. The RSI is sitting at 68.52, suggesting that in a corrective phase, prices have bounced about as much as they should be expected to before returning to their downward trend.

And lastly, on the bottom of the chart is a combination Stochastic/RSI indicator that is also pegged at the upper limit of 1.00, reflecting highly overbought conditions on a short-term (daily) basis.

Right now, the growing conflict in the Middle East between Iran and Israel, following President Trump’s decision to exit the phony Iran nuclear agreement put together by former President Obama, is acting as a lever for holding crude oil prices up going into the summer driving period. Therefore, we don’t expect to see a correction in energy prices for a while.

Hidden Earnings Punishment

The stock market is masking much of what is happening. The truth is stocks are really not rallying on surprising good earnings from last quarter, but any companies missing earnings are being severely punished.

Much of the market’s performance is centered on a handful of FAANG tech stocks.

You might be interested to know that the FAANG stocks of (Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG)) now represent 27% of the Nasdaq Composite Index and this ratio is becoming greater as the capitalization of these companies continues to dominate.

When the majority of the market’s movement is because of a handful of big-cap tech companies, while the rest of the market is struggling, it is masking the true underlying quality of the market’s health.

This is a time for extreme caution.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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