Houdini often used misdirection to help him become one of the
most famous magicians in history. He would focus the
audience's attention elsewhere 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.
The Illusion
It's earnings season and last week had no shortage of
surprises or misdirection. For example, on Thursday, 7/26,
the following S&P 500 (SNP: ^GSPC) companies had negative
surprises and guidance at the times given below as reported by
Reuters:
- 3M (
MMM
)- Missed Revenues at 7:08am CDT on 7/26, but up 1.2% on 7/26
& 7/27
- Amazon (NasdaqGS: AMZN) - Missed Revenues at 3:08pm CDT on
7/26, but up 7.9% on 7/26 & 7/27
- International Paper (
IP
) - Missed Revenues at 8:00am CDT on 7/26, but up 2.8% on 7/26
& 7/27
- Waste Management (
WM
) - Missed Earnings at 6:50am CDT on 7/26, but up 5.7% on 7/26
& 7/27
Although all of these companies missed their numbe rs, they all
have one peculiar thing in common. Their prices all
rose - many drastically. In fact almost 400 of the 500
S&P 500 companies rose on Thursday (7/26) taking the S&P
500 up 1.6%, 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". So why did prices rise
so drastically on Thursday (7/26) and follow through even stronger
on Friday (7/27)? The answer has nothing to do with earnings,
buying the negative sentiment, or individual company performance as
the media or conventional wisdom would lead us to believe; it is
all about themacro-environment, specifically, the Euro, and I will
prove it.
The Real Magic Trick
The below chart, provided in the ETF Profit Strategy Newsletter
shows the extremely high correlation between the Euro (NYSEArca:
FXE) at top and the S&P 500 futures (CME: SPU12.CME) on
bottom. This correlation started at 5am Central Daylight Time
(CDT) on 7/26 and continued through 7/27's early
afternoon.
Even more interesting is Thursday's gains all occurred before
any companies even announced their earnings as the chart shows the
S&P 500 futures up over 20 points by 7am CDT driven by the
extremely large 60 minute move in the Euro that occurred at 6am
central on comments out of the ECB.
This chart implies that following earnings is a misdirection and
trading the earnings certainly wouldn't have made you money.
Factors well out of a company's control have more impact on
share price than company performance or expectations do. The
Euro continued to rise on 7/27 propelling the S&P 500 higher
again, making Friday's earnings another distraction as
well.
A top down, more macro, instead of bottoms up and company
specific 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.