The current estimate for 2015 sales across the S&P 500 companies is 0.3% below that for 2014, while earnings are expected to rise 4.8%. The sales slowdown is primarily attributed to the strength of the dollar and the weakness in the oil price. Yet the Brent crude March 15 future has closed above its 50 day moving average for the first time since late July last year and is up 21% from the mid January low.
EPS Momentum for the average S&P stock is -0.73%, having fallen from being almost flat in the previous two months.
EPS Momentum across the Energy sector is -29%, while the next worst industry group is Materials at -4.2%. Only the 37 stock Food & Staples Retailing sector has positive EPS Momentum over the past month. Pantry, Safeway and Casey’s General Stores head the upgrades among US names in this sector.
Yet at the individual stock level, 146 names, or 29% of the total, have positive EPS Momentum and there have been double digit upgrades at five companies, which are Southwest Airlines, Target, Level 3 Communications, Electronic Arts and Alcoa. The list of worst momentum is dominated by Energy stocks, which account for 30 of the 36 most severe downgrades over the past four weeks.
However, it is not all gloom across this sector.
The median stock is up over 5% in the past week, while backtested positive technical indicators have fired on 47 of the 395 names (12%) and negative on only nine. The cost of credit is close to the highest level since May 2009, but would appear to have topped out at a resistance level just below the top end of the long term average range.
Net insider selling was $61m over the past month, but this is a tiny blip on the long term chart and there has been net buying in the last two days.
Of the six stocks where backtested positive technical signals fired overnight, the most significant is for the largest name Valero Energy, which is also in the top 10% of EPS Momentum in the sector (+6.2%), with low sector relative implied volatility and an unusually rapid tightening in the CDS over the past week. The sector relative CDS level has fallen to a most exceptional low.
Four names with backtested positive signals over the past week are also in the top 10% of EPS Momentum in the sector, with Marathon and Enbridge the two larger cap names on this list.
Over in Europe, the Energy downgrades are also sharp, but not to the extent seen in North America. Directors have been net buyers of shares over the past month and while implied volatility is above the average level for the last year, it has fallen in the past five days, which may indicate a more positive trend for the sector.
However, there are no backtested positive signals for European Energy names that are also in the top 10% of EPS Momentum for the sector, and the largest share in the top 10% is Neste Oil in Finland. Even though the stock is down 12.5% over the past week, its forward valuation remains at the long term high relative to the sector and the CFO made his first discretionary sale of the shares towards the end of last week. The top level directors in this name backtest well, with the shares having risen after they bought and fallen after they sold, in the six months following the deals over the past eight years.
The oil price has staged something of a recovery and is trading just above an interesting technical level. Energy shares have responded by trading up over the past week, while the downgrades continue thick and fast from the analyst community that is working its way through reporting season. The downgrades are so severe that they have had a major impact on the aggregate S&P 500 forecasts, but with the price recovery seemingly underway, we may be at the low point of estimates for the index.