Stocks End Week Mixed As Earnings Season Officially Begins

SPX- Bulls Defend 50 DMA Line
SPX- Bulls Defend 50 DMA Line

Friday, July 13, 2012
Stock Market Commentary:

Stocks and a slew of other “risk-on” assets spent most of the week in the red before staging a strong rally on Friday to help send them into positive territory. The big catalyst for the week was stronger-than-expected earnings reports from US companies, especially JP Morgan (JPM) and Wells Fargo (WFC). The market is back in rally-mode which suggests the path of least resistance is higher. The current rally began on the June 29, 2012 follow-through day (in the immediate wake of late June’s EU summit). At this point, investors appear to be looking past the larger macro concerns (e.g. a slowing global economy, European debt crisis, fiscal and monetary cliff in the US, et al) as they continue to snap up risky assets.

Monday-Wednesday’s Action- Stocks Quiet Ahead of JPM & WFC Earnings:

Stocks ended lower on Monday as investors digested disappointing economic data from Asia and Spanish yields topped the closely watched 7% level. The Chinese consumer price index (CPI) rose +2.2% year-over-year. Meanwhile, core machinery orders in Japan tanked -14.8% month-over-month which missed estimates and bodes poorly for the global economy. Yields for Spanish 10-yr debt topped 7% for the umpteenth time this year. Historically, 7% or higher is considered a danger zone for sovereign debt so we’ll have to see how this plays out. After Monday’s close, earnings season officially began when Aloca (AA) reported their Q2 results. The aluminum giant reported a loss but beat estimates. AA shares fell close to -5% on Tuesday. Remember, as we make our way through earnings season, that it is very important to not only focus on the actual earnings data but focus on how individual stocks and the major averages react to the numbers. One of our trading secrets, that has helped us outperform the market since our inception in 2004, is to focus more on how stocks react to the news, than the actual news itself. 

Stocks fell on Tuesday after several US companies issued profit warnings and the latest dark clouds in Europe resurfaced. Stocks opened higher but closed lower, which is a sign of weakness, not strength, after EU officials gave Spain an additional year to meet a 3% budget deficit target. Euro-zone finance officials also agreed to allow Spain’s banks to access up to 30 billion euro ($36.9B) in additional funding by the end of July. The final figure, which will be announced on or before July 20, could hit 100 billion euros.  However, stocks fell after Italian Prime Minister Mario Monti reaffirmed that his country will not need a bailout but might access Europe’s stability fund, if needed. In the US, the National Federation of Independent Business said its small business index, which measures small business sentiment, fell hard in June for the second consecutive month. This bodes poorly for the ongoing economic recovery. 

Stocks fell on Wednesday after the minutes of the latest Fed meeting showed that they are not interested in another round of monetary easing anytime soon. The Fed said: further policy stimulus likely would be necessary to promote satisfactory growth,”and that the Fed should study ‘new tools’ for easing.”  Several members of the FOMC are also concerned with a “significant slowdown” in China. This disappointed investors as they desperately want more easing from the Fed to help stimulate a slowing US and Global economy. Elsewhere, Brazil’s central bank cut its benchmark interest rate by 50 basis points to 8% which matched expectations. This is their latest rate cut to help stimulate their slowing economy.

Thursday & Friday’s Action- JPM & WFC Top Estimates:

Stocks opened sharply lower on Thursday but spent the rest of the day erasing earlier losses to close near the session’s highs. Stocks soared on Friday as investors digested the latest round of economic and earnings data. Before Friday’s open, overall producer prices swelled by +0.1% in June which topped the Street’s estimate for a decline of -0.6%. Meanwhile, core prices, which exclude food and energy, rose by +0.2% in June which matched estimates. The big news was that both JPM and WFC surprised the Street by reporting stronger-than-expected Q2 earnings results. This bodes well for earnings season and helped allay a lot of concerns that the US financial sector was suffering.

Market Outlook- Rally Under Pressure

From our point of view, the current rally is in a confirmed rally which means the path of least resistance is higher. It is somewhat encouraging to see all the major averages close above their respective 50 DMA lines. Technically, the 200 DMA line and June’s lows are the next level of support while April’s highs are the next level of resistance for the major averages.  As always, keep your losses small and never argue with the tape. If you are looking for specific help navigating this market, feel free to contact us for more information. That’s what we are here for!

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