This week the market shot higher after an extended holiday. From the beginning of the week the price action was bullish. Traders expected dovish statements from the Fed Chairman and he delivered. The S&P 500 rallied to new all-time highs yesterday and it was able to hold the gains.
This morning, Wells Fargo and J.P. Morgan Chase posted solid results. Good news is priced in and both are relatively flat after the releases. Earnings will dominate the scene next week.
About 20% of the S&P 500 companies have warned. Negative pre-announcements outnumber positive pre-announcements by a ratio of 5 to 1. Revenues are expected to grow 2.5% and profits are expected to grow 1.5%. These are the worst comps in many years. With the market at all-time highs, I believe we are set up for disappointment. This could be a “sell the news” quarter. Guidance for Q3 will be critical and traders will be looking for any signs of growth.
The first two weeks of earnings season are loaded with the strongest companies. That should bode well for the price action. This last leg of the rally has come on very light volume and I don’t trust it. I believe we could creep higher for a couple of weeks and we will extend the all-time high. That will attract bullish speculators and they will get the door slammed in their face as earnings season unwinds.
Commodity stocks have rebounded this week and there is no news to justify the move. This is simply an oversold bounce. Global economic conditions continue to slip.
China will release major economic news Sunday night (industrial production, retail sales and GDP). The results will be weak and this will weigh on the market. Given the current level of optimism, traders will contain the selling under the assumption that the PBOC will ease. China is satisfied with its current level of growth and I do not believe they will loosen.
For many months, traders have been calling for a bottom in Europe. Conditions are dire and I’m not seeing any uptick in demand. International corporations have also provided dismal guidance.
Ben Bernanke’s statements have not changed in the last two months. He said that current economic conditions warrant accommodative monetary policies. Even if the Fed tapers, they are still adding liquidity to the system and it is considered accommodative. He also said that the 7.6% unemployment rate is not reflective of the current job situation. Conditions are worse than the number suggests.
Corporate profits won’t grow much this quarter, but they will still be at record levels. Cash flows are strong and balance sheets have never been better. Companies are repurchasing shares and that will keep a bid to the market.
On the flipside, interest rates are rising and global economic conditions are slipping. The combination of these two forces suggests that we will be in a trading range the next few months.
I have not participated in the last leg of this rally and the move yesterday cost me some money. I was long a handful of puts and I exited the position near the close when the market held onto gains.
I can’t buy into this rally ahead of China’s numbers. They will be weak, but the market will take it in stride. Decent earnings from major corporations will push the market higher. I plan to trade post earnings on a stock by stock basis. I will be looking for improving macro conditions and a breakout through horizontal resistance. I will keep my bets fairly small knowing that the headwinds are blowing.
Let’s see what earnings season brings. I’m hoping that Q3 guidance is strong, but I am skeptical.