With Earnings Season Drawing to A Close, This Could Be A Bumpy Week for Stocks

As I have pointed out on many occasions in the last few months, the big move down in stocks at the end of last year wasn’t about anything that actually happened. While Q4 wasn’t exactly a barnburner, it wasn’t a disaster either. Job growth remained strong, wages were starting to pick up as a result and, most importantly of all, corporate profits were at record levels.

Still, there was a feeling in the air that with all the potential disasters lurking, something had to go wrong at some point. At the time I maintained that the underlying data were more important, and, sure enough, we have recovered most of the losses.

Stocks, however, never move in a straight line, and this looks like a week when things could easily reverse.

Again, it comes down to the market’s focus rather than any hard data, and that focus is likely to shift back this week to worrying about what might happen in the future.

For the last few weeks, the prophets of doom have been pushed into the background as traders and investors have instead celebrated success where it really matters. Earnings growth for Q4 was not as strong as most of us would like, but still significantly better than many people expected.

As of the end of last week, with around eighty percent of S&P 500 companies having reported, around seventy percent had beaten expectations for Earnings per Share (EPS), with well over sixty percent beating estimates for revenue. (See FactSet's Earnings Insight for more details).

That isn’t quite as impressive as it may sound as around sixty-six percent of companies beat earnings expectations on average every quarter, but for a period that some were predicting would be a disaster, better than average is decidedly positive. That has turned a bounce in stocks into a full-on recovery, but with earnings season drawing to a close, attention will shift back to potential problems.

After all, with one noticeable exception, the issues that were so worrisome a few months ago are still with us.

As the self-imposed deadline for a trade deal with China approaches there is still no deal in place, and the Chinese economy is showing increasing signs of feeling the pinch. Brexit is, if anything, even more of a mess now than it was then, and with North Korea, the Middle East and several other hotspots the world is still a dangerous place. There is plenty to worry about.

There is one bright spot though, and it is an important one. The Fed has begun to take a much more “flexible” stance on interest rate hikes. Now a case can be made that if that is in response to the market turbulence, it sets a very dangerous precedent for the future and will encourage a short-term, trader-driven approach to monetary policy that can only end badly.

That, however, is a long-term concern, and for now slower rate hikes will keep cash in equities and support the market.

With that and the fact that companies are still thriving in the U.S. any weakness will probably be temporary, but it does look certain before too long, especially as the pessimists now have something concrete on which to hang their hat. These days, when anything can be described as “the worst since 2009” it is not a good sign, and that was the case with last week’s terrible retail sales numbers.

The technical picture indicates a selloff is likely too. The S&P 500 is close to a major point of resistance formed by the triple top that formed last year just before the index fell off a cliff. Even with the support of earnings, breaking that level would have been a challenge. Without it, a retracement looks imminent.

That triple top also provides a convenient level off which to set stops for those that are looking to play any dip directly, through futures or ETFs as a break above it would, from a technical perspective clear the way for a move up to new highs.

That, however, looks unlikely right now. With good news from earnings slowing to a trickle, the attention of traders and investors will be on what to worry about next. As long as there is no definitive trade deal announced, that will mean a bumpy ride for stocks over the next few days.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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