Why This Could Be a Good Week for Stocks
U.S. stock index futures, as I write, are indicating a slightly lower opening this morning, but the week is starting with a sense of anticipation more than anything. It is week two of earnings season, and a flood of reports are expected, so a lack of enthusiasm for trading in front of so much information is understandable. When earnings are coming thick and fast, the market reaction to them often tells us more than the numbers themselves. That will be the case this week, and the general air of positivity and the nature of earnings make it likely that it will be a good week for stocks.
Of course, some individual results will be important, particularly for those holding the stocks concerned. Netflix (NFLX) tomorrow, Tesla (TSLA) and IBM (IBM) on Wednesday, and Intel (INTC) Thursday will all be of interest to tech investors. On the more traditional end of the scale, railroads CSX (CSX) and Union Pacific (UNP) will also be closely watched by those looking for clues as to the degree of disruption in the supply chain, and the prospects of recovering from that bump in the road.
There is something for everyone this week, but the most important lesson that retail traders and investors can glean from earnings is what traders choose to focus on.
Will a small beat on EPS by a Tesla be seen as a positive or a letdown? Will acknowledgement of supply bottlenecks by the railroads be greeted with a shrug of the shoulders, or will it be treated as if it is news, and disturbing news at that?
In other words, what is the mood of the market going into the week? So far, the signs are positive.
Over the weekend, the Chinese government informed us that growth there in the third quarter was an extremely disappointing 4.9%, lower than expectations and a big decline from the previous quarter’s 8%. Given the outsized influence of China on global growth, that is undoubtedly bad news, and yet, here we are, with the major indices showing only moderate losses and some growth sensitive markets such as crude oil trading significantly above Friday’s closes. That, in itself, could be seen as bad news, given all the talk about the negative impacts of a global energy crisis, and yet stocks are down only a fraction of a percent.
Earnings this week are, based on history, only going to reinforce that positivity.
On average, well over two thirds of companies beat expectations for EPS each and every quarter. It is early, with only 8% of S&P 500 companies reporting, but so far, we are on target to exceed even that. 80% of companies that have reported have beaten on EPS, with 83% beating revenue expectations. It isn’t quite that simple, as many have highlighted staffing and supply issues that will be a challenge next quarter, but, with a prevailing optimism, such a high rate of beats cannot help but support the market.
The trader in me sees all this as a warning. When everyone is bullish on everything, a pullback is coming, but the question is always when it will come. For it to happen this week there will have to be a major negative shock, but if you traded based on the possibility of a disaster you would be short 100% of the time, and 100% wrong over any extended period. So, with indications of underlying bullishness still strong, and with earnings likely to give a boost, early weakness today looks like a buying opportunity rather than a warning.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.