As the new guy at Zacks, I thought I would introduce myself by
providing a few thoughts as we enter the upcoming earnings season
First, I like to get a lay of the land from a historical
perspective and examine seasonality. July has tended to be
a positive month for the S&P 500, but the breadth of the gain
is not strong. Going back to 1929, the S&P 500
has posted an average return of 1.48% in July. Although
July has produced the strongest average monthly return of the
year, the S&P 500 has risen 48 of 85 months or just 56.5% of
the time. The average return in the 48 up months has been
5.14%, while the average return in the 37 down months has been
-3.26%. A number of other months have produced a
higher percentage of positive return.
Second, it might be worth noting how the S&P 500 has
historically traded through the Q2 earnings season.
Convention wisdom sees
), Zacks Rank 3, as the company which kicks off the
season. It is possible to use the
Alcoa earnings event to benchmark the path of the S&P
500 through earnings season. The graphic displays a 5, 10,
and 15 year average price movement of the
S&P 500 ETF
). The price of SPY was benchmarked to the close of the day
before Alcoa released earnings and examined for 20 trading days
after Alcoa's profit release. The chart indicates the
S&P 500 has tended to see price strength early in the Q2
earnings season, but strength seems to fade as the season
progresses. Additionally, the market has performed strongly in
the past 5 years relative to the past 15 years.
Third, there is great uncertainty over the pace of economic
growth and the outlook for profitability in Q3. The JPM
Global Composite PMI output component fell 1.5 to 51.4 in June
and shows the global expansion muddling along. Emerging
economies, which have provided support to global growth, seem to
be struggling, Europe continues to fight recession, and the U.S.
economy is throwing off mixed signals.
An 80% non-manufacturing to 20% manufacturing mix of the
ISM activity and production components fell almost 3.0 to 52.0 in
June - the lowest since July 2009. However, the economy
also created 195,000 jobs in June and payroll growth seems firm.
Fourth, recent profit releases from
), Zacks Rank 3,
), Zacks Rank 3, and
), Zacks Rank 3, were unable to generate great confidence in the
profit outlook, and have probably generated some caution about
the strength of Q2 earnings. Signs of profit strength
in early July could allow the market to reduce its focus on QE
tapering and Federal Reserve policy. Vibrant profit growth
could also ease nervousness in the trade over the idea that
higher interest rates will cap the economic expansion.
Fifth, investor optimism is mixed going into earnings season. The
American Association of Individual Investors poll of sentiment
showed the bull index up 11.7 to 42.0 and the bear index down
11.4 to 23.8 in the week ending July 3rd. Individual investors
seemed to have turned more constructive on the market. A
pick up in calming words from Federal Reserve members and recent
price strength have helped to boost optimism. However, the
CBOE put to call ratio shows less bullish positioning. The
10 day average was 1.05 through July 3rd and is consistent with a
neutral to cautious view toward stocks. Put volumes
have slightly outpaced call volumes.
Sixth, watch what Alcoa says about end demand for its
products. Autos and aerospace have been strong sectors and
were seen growing 1-4% and 9-10% respectively in 2013 at the end
of Q1. Heavy trucks and commercial construction demand was
projected up 2-7% and 4-5% respectively in 2013. A
downgrade to these assessments may influence the demand for
cyclical shares, and the overall economic outlook.
Likewise, the market will be sensitive to the outlook for
China's aluminum demand, which had been projected up 11% in
2013. Demand for the World excluding China was expected up
4% in Alcoa's Q1 press release. European and North American
aluminum demand was seen down 1% and up 4% respectively in 2013.
To read this article on Zacks.com click here.
Seventh, the market will be watching to see if rising interest
rates have translated to stronger bank profits, and earnings
momentum in the banking sector. Bank shares have hit new
highs in recent days based on the price movement of the
SPDR S&P Bank ETF
). A strong bank sector is likely to support the overall
tone of the market - a bull market needs leaders. Thursday,
), Zacks Rank 3, and
Bank of the Ozarks
), Zacks Rank 2, report earnings, while Friday, July 12th
), Zacks Rank 3, and
), Zacks Rank 2, report profits.
I'm excited about the trading environment in the coming
weeks. Buckle up your seatbelt and be ready to grab the
opportunities as they present themselves.