Last week, stock prices reacted to the news. Stock picking
could become more important as the market reaches new highs, and
one technical indicator could be helpful to traders looking to
avoid downside surprises.
It Is Becoming a Market of Stocks
Fed chair nominee Janet Yellen confirmed that quantitative easing
and low interest rates should continue for the foreseeable
future. Traders seem to believe this is good news, and
SPDR S&P 500 (NYSE:
gained 1.56% last week.
The ETF has now closed up six weeks in a row. SPY has had a
winning streak of this length 15 times in the past 20 years. In
the short term, this winning streak offers us little information.
The next week closed up seven times and lower eight times. Longer
term, SPY was up six months later 80% of the time.
The winning streak is interesting, but in the long run, stock
prices are driven by earnings, and the trend in earnings is
likely to determine whether prices are higher or lower six months
Earnings season came to an unofficial end when
reported last week. On this front, the results were mixed. Among
the large-cap stocks in the S&P 500, Standard & Poor's
reports 66.59% beat earnings estimates, the best beat rate in at
least six quarters.
For the broader market, according to Bespoke Investment Group,
only 58.6% of 2,268 companies beat expectations. Bespoke noted,
"Since the bull market began in March 2009, this is the second
worst earnings beat rate we've seen. Only Q1 of this year was
This mixed picture is typical of the challenge confronting
investors. Success requires sifting through data that can be
conflicting to find what matters the most to traders at any
particular time. This week, earnings seemed to drive the price
action in specific stocks, but the general trend in the market
may have been set by comments from Yellen, the woman who will
replace Ben Bernanke as head of the Federal Reserve.
Yellen is expected to be much like Bernanke from the
perspective of investors. As she explained in testimony to the
Senate, interest rates should remain low and quantitative easing
will continue in an effort to lower unemployment.
This environment is generally good for companies, and earnings
are likely to continue drifting higher, but in an unpredictable
way. Investment success will most likely come from getting the
larger trend right and being in the best stocks.
Relative strength (
can be a valuable tool in this market environment.
Cisco Systems (NASDAQ:
missed estimates and fell more than 10% the day after the
announcement. Prior to the announcement, RS indicated the stock
was weak and should be avoided.
has been a leader in RS, and the stock jumped when the company
beat expectations in the most recent quarter.
For now, the stock market is bullish. However, not all stocks
are bullish. Many traders are hoping for a turnaround in
J. C. Penney (NYSE:
, but they have been disappointed all year, and RS indicates they
are likely to continue to be disappointed.
We are in one of those markets where stock pickers can earn
large rewards. It could be best to stick with stocks with high RS
because these are the ones that are leading the market.
Bottom-fishing might be appealing, but it is not usually
profitable in a bull market.
RS Also Highlights Weakness in Gold
SPDR Gold Shares (NYSE:
was almost unchanged last week, closing up only $0.04 on the
week. RS has been bearish on GLD all year and remains far from a
ETFs tracking mining stocks are also on RS sell signals. We
should expect the miners to turn up ahead of the metal. In a true
bull market for gold, we would expect to see miners and metals
showing high RS.
Investors worried about inflation could consider adding to
their positions in GLD since the downside appears to be limited.
However, from a trading perspective there is no reason to
consider GLD a buy.
This article originally appeared on ProfitableTrading.com:
Market Outlook: Simple Indicator Could be
Invaluable in This Market Environment
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