With stocks posting gains Monday and early in Tuesday's trading, it appears
as if investors are taking the glass half full approach to earnings season.
The primary driver in the coming weeks will be the forward-looking statements
that accompany earnings reports. From Bloomberg:
"A positive earnings season would help in an environment where data may
still not provide an obvious picture of the U.S. economy," said Luca Paolini,
who helps oversee about $66 billion in equities as chief strategist at
Pictet Asset Management Ltd. in London. "Profit margins have proven to
be relatively resilient. The most critical issue we are looking at is company
guidance for the next few quarters."
On Monday,
we noted the importance of how the S&P 500 acts near 1643. Below is an
updated version of the chart as of 11:15 AM EDT Tuesday. The relevance of the
thin colored moving averages is described in this segment from
last weekend's video.
Central Banks Not Rushing To Remove Punch Bowl
After the markets reacted negatively to the hypothetical tapering plan from
the Fed, the central bank was quick to point out they have no imminent plans
to begin a traditional campaign to increase interest rates. The Wall
Street Journal touched on the possibility of a targeted bubble control
approach that may be adopted by global central banks:
Ben Bernanke and his counterparts around the world, seared by the worst
financial crisis in 75 years, are searching for ways to halt borrowing
binges before they morph into bubbles, and to push lenders to shore up
their defenses before the next crisis arrives. Lifting interest rates to
discourage borrowing has long been considered a blunt but effective weapon.
But that isn't a step central banks are eager to take when inflation is
low or unemployment is high--as they are in many places now. So some central
bankers are experimenting with targeting only pockets of financial excess.
Because financial bubbles so often involve real estate--and because that
sector was at the center of the last crisis--many are focusing on ways
to control booms in housing prices by curbing mortgage lending.
Housing Could Be Target
It appears as if market participants fear a bubble targeting approach could
negatively impact home builders. The market leadership provided by home builders
in 2012 has been absent noticeably over the past three months. The chart below
shows the performance of home builders (XHB) relative to the general stock
market (SPY). When the ratio falls (black line), it shows waning demand for
home builders relative to the broader stock market.
Investment Implications
As the chart shows below, stocks have done something they have not been able
to do over the past twelve years; break out above long-term resistance. This
tells us to respect the possibility of further upside from a longer-term perspective.
The intermediate-term outlook has been somewhat cloudy since the tapering-induced
scare hit the global financial markets. The opening chart in this article showed
possible improvement from a short-term perspective (daily chart). The chart
below shows possible improvement from an intermediate-term perspective (weekly
chart).
If the S&P 500 can remain above its 50-day moving average (1628) and 1643,
we will listen to our market
model and take another incremental step back toward risk. Areas where we
may redeploy some cash include broad positions, such as the total stock market
(VTI), or leading sectors, such as small caps (IWM), financials (XLF), and
consumer discretionary (XLY). Should the S&P 500 retreat below its 50-day
moving average, our short-term bias would become more defensive.
