Following the corporate earnings release for NIKE, Inc. (NYSE/NKE), shares collapsed. During its corporate earnings call, the company’s management issued a statement indicating that they see further uncertainty in the world economy, raising specific issues in Europe and China among other emerging markets. NIKE CEO Mark Parker specifically stated that the company expects these areas to grow much more slowly than they have over the past several years.
In a previous article (“Just Do It—Has NIKE Done Enough?”), I discussed some of the positive parts of NIKE’s business. While many are envious of the corporate earnings growth the company has been able to generate over the past few years in emerging markets like China, where the firm has over 7,000 stores, a slowdown is now negatively impacting corporate earnings. The worldwide slowdown is having an impact on estimates, and with such a global brand, one can only assume that other firms in the equities market will also voice similar caution in their corporate earnings releases.
In that timely article, I also noted several key drivers for the firm, including the Olympics and the new NFL contract. I also mentioned that investors should not buy shares in the firm at that time, but should wait until late 2012 through 2013 when the corporate earnings will be positively impacted by these events. I did caution that the shares were overbought and likely to break down with a key support level at $90.00. Since that time, shares have fallen from approximately $108.00 to $90.00, down 16.7%.
NIKE’s corporate earnings release coincides with last week’s release of the Institute for Supply Management (ISM) survey, an important factor for the overall equities market. The results were extremely weak to say the least. The ISM Purchasing Managers Index (PMI) declined to 49.7 for June. (A reading below 50 indicates a contraction in the economy.) Another component that was negative is the ISM Prices Index, which was reported at 37, a decline of 24 points over the last two months. The prices components as well as the PMI index itself will weigh on the equities market, as investors fear this will translate into weaker corporate earnings.
Chart courtesy of www.StockCharts.com.
The chart shows the importance of past pivot levels for stocks in the equities market. As NIKE’s corporate earnings disappointed, the stock sold off with massive amounts of volume as marked by circles in these areas. The stock then fell to the support area and is now trying to rebuild some of the damage done. However, I would caution investors to not yet step in, as there is further downside potential.
The risks to the global economy are considerable, and won’t be fixed anytime soon, weighing down the equities markets over the next few months. The results for positive corporate earnings from either the Olympics or the NFL won’t come to fruition for some time. We are then only left hoping for a turnaround in either Europe or the emerging markets, such as China. Those, I fear, are doubtful in the short term. In the long term, however, I would look at possibly beginning to accumulate shares in the fall or perhaps the spring, as prices stabilize and the world economy begins to show some signs of life. Note that the 200-period weekly moving average is close to the next support level at approximately $75.00, if NIKE were to break down from here.