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Prelude To Earnings

7/13/2014 3:13:31 PM

Market Summary

The S&P500 and Nasdaq Composite indexes just wrapped a sixth straight quarter of gains, a hot streak not seen in more than fourteen years. After the S&P 500 index 30% gain last year many investors anticipated a slow-down to the five year equity bull market. But the Nasdaq has now recorded its longest streak of quarterly profits since 2000. The S&P500 is having its best run of quarterly gains since 1998. Each dip or correction has been a buying opportunity for investors as the market continues to climb a wall of worry.

Index Comparison Chart

Market Outlook

The S&P 500 index established 22 record closing highs so far this year, which has analyst warning that the market might be due for a technical correction. Stocks suffered the biggest weekly drop since early April. Just like the early April price pullback was prelude to the pickup in earnings announcements where investors bid stock prices back up, the current market action is probably similar. All the recent quarterly earnings announcements followed a similar pattern, prices stall as earnings season begins, and then the market rises as announcements pick up the pace. In the updated chart below you can see that last week, investors moved funds out of equities and invested in treasury bonds and gold as these assets prices moved higher.

Gold daily Chart

Gold is far and away the leading performer over the past month as investors looked to hedge their risk due to unrest in the Middle-East. In the performance graph below you can see equities lagging the other asset classes as investors remain cautious ahead of second-quarter earnings announcements.

Sector 30-Day Performance

The July 6th Weekly Update said "Momentum Factor ETF MTUM Heikin-Ashi chart continues to signal the overbought condition needs to be resolved, but stocks continue to churn higher. Though the chart has been showing candlestick bearish reversal signs."

MTUM Daily Chart

The updated chart below confirms our analysis above as the equity market had a down week to resolve overbought conditions and the price followed through on the candlestick bearish reversal signal. Equity prices appear to be stabilizing and trading sideways before the next move higher (or lower).

MTUM Daily Chart 2

The CBOE Volatility index is holding at multi years lows as equities sustain at all-time highs.

S&P500 versus VIX 5-Year Chart

One item to keep your eye on is whether the VIX continues moving higher off the bottom. In the six month chart below the VIX bounced higher last week, if the upward trend continues it is may indicate impending higher volatility. A higher VIX would probably mean a market pullback.

VIX 6-Month Chart

The updated American Association of Individual Investor (AAII) survey below shows sentiment readings close to the historical averages - this suggests a neutral outlook for the market.

AAII weekly Readings

Second-quarter National Association of Active Investment Managers (NAAIM) exposure index averaged 81.64%, the current exposure is 82.47%

NAAIM Exposure Index

Trading Strategy

Second quarter earnings season picks up steam next week with technology companies taking center stage. Tech companies scheduled to announce next week include Intel, Yahoo, EBay and Google. The technology sector has the highest projected earnings growth rate among the 10 major S&P sectors for the second quarter at 12.30%, its best quarter since the first quarter of 2012 according to a Thomson Reuters poll. Goldman Sachs analysts are reporting that the information sector is the most undervalued sector, giving investors justification to be bullish on tech stocks. The financial sector has the worst earnings forecast with a decline of 3.5% from a year ago. Banking firms set to report earnings next week include JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley.

Looking at the performance graph covering the past three months you can see which sectors are hot, and who is not. As earnings season picks up steam, the best bets are stocks you like in the best performing sectors. Technology, Energy and Healthcare are the hottest sectors right now, buying shares of the best performing companies in these industries should be profitable.

Sector Performance 60-Day Chart



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