Houdini often used misdirection to help him become one of the
most famous magicians in history. He would focus the
audience's attention on an illusion, so they wouldn't notice what
he did to complete his magic trick.
Today, the media and financial professionals use similar
misdirection when trying to explain the stock market's movements.
They focus your attention on earnings and other illusions of
today's market when the real driver of price is completely
different.
At the end of July, I wrote an
article
titled, "Why are Stocks Rallying? A Look Beneath the Hood"
outlying what really was driving the market. In that article
I raised the concern that making investment decisions based on
earnings was likely to leave you disappointed as earnings were not
driving stock prices.
In this update I take a look back at what was really driving
share prices then and if that trend continues today. If
so, then you should avoid getting sucked into the upcoming earnings
season drama and focus on what really matters to the market.
The Illusion
During last quarter's earnings season I gave the below examples
of earnings announcements, misses, and stock price results.
During the heart of 2Q earnings season, on Thursday, 7/26,
the following S&P 500 (NYSEARCA:SPY) companies had negative
surprises and/or guidance as reported by
Reuters:
- 3M (
MMM
)- Missed Revenues on 7/26, and up 1.2% on 7/26 & 7/27
- Amazon (NasdaqGS:AMZN) - Missed Revenues on 7/26, and up 7.9%
on 7/26 & 7/27
- International Paper (
IP
) - Missed Revenues on 7/26, and up 2.8% on 7/26 & 7/27
- Waste Management (
WM
) - Missed Earnings on 7/26, and up 5.7% on 7/26 & 7/27
Although all of these companies missed their numbers, they all
have one peculiar thing in common. Their prices all
rose - many drastically, even though many of the companies
missed their earnings and lowered guidance.
Per
Reuters
, "this quarter is the first quarter in three years where earnings
are expected to fall year over year".
CNBC
also stresses the importance of this upcoming earnings season as
the deciding factor in the "market's next direction".
So why did prices really rise through last earnings
season? The answer has nothing to do with earnings or
individual company performance as the media or conventional wisdom
would lead us to believe; it is all about the macro-environment,
specifically, the Euro, and I don't expect that to change this
earnings season either. I show why below. (VIDEO:
Are the Dow Transports Confirming the Market?
)
The Real Magic Trick
In the previous article I gave a detailed example of how the
S&P 500 futures were already up in price before any of the
above earnings announcements were reported and that is what really
sent the markets higher on 7/26. The futures rose with the
Euro and were up significantly before any earnings. That was
a trend that washed, rinsed, repeated virtually every day. Of
course the media led the public to believe it was all earnings
induced rallies and didn't mention the fact that the market was up
already on the back of the Euro, well before the earnings
announcements on most days.
Below I have an updated chart comparing the September prices of
the S&P 500 and the CurrencyShares Euro Trust
(NYSEARCA:FXE). The extremely high correlation between the
markets and the Euro continues still today. The Euro/USD
relationship is the main driver behind US stock market prices, not
earnings.
The chart shows how hard it is to even distinguish between the
price history of the Euro and the S&P (SNP:^GSPC), and the
correlation analysis at the bottom confirms the extreme
similarities between the two.
Following earnings is a misdirection, and trading the earnings
likely wouldn't have made you money during last quarter's earnings
season.
Factors well out of a company's control have recently had more
impact on share price than individual company performance or
expectations. The Euro's rise and fall over the past month
continues to move the S&P, making next week's kickoff to
earnings season just another distraction.
A top down, more macro, approach is much more relevant in
today's market environment. Avoid misdirection by following
what really matters. Along with the Euro, the
ETF
Profit Strategy Newsletter
follows the major macro asset classes and exchange-traded products
(ETPs) like the ProShares Ultra Euro (NYSEArca:ULE), the SPDR Gold
Shares (NYSEArca:GLD), and the iShares Barclays 20+ Year Treasury
Bond (NYSEArca:TLT) to help investors avoid the noise and keep
their eye on the real drivers of market prices.
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