Prepare for Earnings Season and a Shift In Market Character
Economic news Thursday, combined with upcoming earnings reports, will change the manner in which the market is trading.
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Slightly hotter-than-anticipated CPI and higher-than-expected weekly unemployment claims are giving market participants a convenient reason to do a little selling. The market has been running on momentum and little else recently, so it doesn’t take too much to trigger profit-taking.
Early breadth is poor on Thursday, with small-caps leading to the downside. The Russell 2000 ETF IWM is down 1.3% and close to testing its 50-day simple moving average. Bonds are also weak again as interest rates rise in response to the economic news. The 20+ Year Treasury Bond TLT is trading below its 200-day simple moving average.
Although the indexes have been quite strong and hitting new highs, many traders, including me, have struggled. There are several reasons that trading has been challenging, but the primary one is that there hasn’t been strong sustained momentum in many stocks, and speculative interest has been limited. While the Goldilocks economic narrative has been the primary positive, the economic news Thursday may be an issue.
What is most important right now is that the character of the action is likely to shift as we enter the third-quarter earnings season. JPMorgan Chase JPM and Wells Fargo WFC will kick things off on Friday morning.
With the indexes close to all-time highs, expectations are high, but what is interesting is that after second-quarter earnings, expectations for EPS growth fell to 4.7% from 7.9% for the S&P 500. Companies lowered expectations so that it makes it easier for them to beat them when they actually report. It is the traditional Wall Street game, and a vast majority of companies will beat those expectations they just lowered three months ago.
The best thing about earnings season is that some new leaders always emerge, and there is more focus on individual stock picking. Many of the stocks I favor are very likely to have good quarters, but they languish when there is no news flow. A good example is Xeris Biopharma XERS, which has an attractive valuation and is performing well operationally. It is very likely to have a strong quarter, but no one seems to care right now.
My message right now is to be ready for a shift in the character of the market. The economic news Thursday, combined with upcoming earnings reports, is going to change the manner in which the market is trading. I’m hopeful that there will be more focus on stock picking and that we will see some hot pockets of speculative action. It has been very dull for aggressive traders lately, but some news flow — good or bad — should help shake things up.
There is poor action on my screens, and we’ll see if dip buyers show up quickly, but I’m still not in a rush to put more cash to work.
At the time of publication, Rev Shark was long XERS.
