Stocks ended the week unchanged, but they should break out
soon as earnings season begins.
Traders Seem Unconcerned By Washington
SPDR S&P 500 (
closed down $0.02 on the week, virtually unchanged from a week
ago. Despite the small change in price, analysts were very
active, explaining that the government shutdown was bad for
stocks on days when the market was down and switching their story
to say the shutdown had no impact on stocks when the market was
In the short term, the shutdown is not important to the stock
market. However, due to the size of the federal government, a
prolonged shutdown would probably have an adverse impact on the
According to data from the Federal Reserve, federal spending
accounted for more than 22.5% of GDP, as shown in the chart
below. A shutdown will decrease spending, which, by definition,
will decrease GDP because GDP is the sum of all consumer,
business and government spending. If this shutdown lasts for
several weeks, there could be a pronounced economic slowdown.
While the shutdown and the upcoming debt ceiling debate make
headlines in the next few weeks, traders will be closely watching
earnings reports as earnings season officially gets underway.
Standard & Poor's expects solid earnings growth this quarter,
with analysts looking for an increase in earnings per share (
) of 11.54% compared with a year ago. This would be the fastest
growth rate seen in two years.
As the above chart shows, analysts are expecting a rapid and
sustained acceleration in earning growth. Traders should watch
earnings reports rather than the news from Washington this week.
If companies deliver strong reports, stock prices should be able
to withstand the shutdown. If earnings disappoint, that will push
stocks down even though the headlines will continue to talk about
I expect companies to meet expectations and continue to
believe that any weakness in the market is a buying
Gold Bear Market Enters Third Year
SPDR Gold Shares (
fell 1.89% last week. Headlines blamed the decline on the
government shutdown. Rather than trying to understand why gold
fell last week, it could be beneficial to take a long-term view
Gold prices peaked in September 2011, more than two years
Commodities tend to make spike highs and then form rounding
bottoms over an extended period of time. One theory as to why is
that when a commodity begins moving higher, investors rush in
because they fear they will miss a big move. This leads to the
Eventually, the commercials, the insiders of commodity
markets, begin selling as much as they can because they believe
the market is overvalued. This selling finally stops the price
advance. Individuals then avoid the market for years because they
remember their loss.
The same pattern can be seen in silver.
Many investors want to buy gold because it has fallen so much in
the past two years. History shows that the decline could continue
and the time to buy will be after a multi-year basing pattern
develops. There will be short-term trading opportunities in gold
and silver while that process unfolds, but for now, neither metal
is attractive on a long-term basis or as a short-term trade.
This Week's News
Most economic news releases are on hold while the shutdown
persists. This will allow traders to focus on earnings, and
companies that beat or miss estimates may see higher-than-average
This article was originally published at
Market Outlook: Don't Get Fooled Into Thinking It's a Good Time
to Buy Precious Metals
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