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A conflicted stock market faces moment of truth as earnings loom
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Loading...After being stuck in a state of suspended animation for the past few weeks, the stock market will finally have its moment of truth as corporate earnings begin rolling out over the next few days.
There will be a lot riding on this earnings cycle. It will be the first quarter since President Donald Trump took office, providing a look at whether the euphoria that propelled major stock indexes to historic levels was justified. It could also be the spark that rejuvenates the market as investors have become increasingly cautious amid signs that many of the pro-growth policies promised by the new president may be delayed.
J.P. Morgan Chase & Co. JPM, -0.35% Citigroup Inc. C, -0.77% and Wells Fargo & Co. WFC, -0.96% will be among the first to report quarterly results. The financial sector has been in the spotlight since the Federal Reserve’s shift to a tighter monetary policy regime, and first-quarter results will be a critical test for whether bank shares have more upside potential.
As Jeffrey Saut, chief investment strategist at Raymond James, noted, the S&P 500 has been corralled between 2,335 to 2,400 for the past couple of months, which he blames on the market being “confused” with no clear indication whether it is headed up or down.
“The best strategy has been to basically do nothing,” said Saut.
“If you are still of the belief we can get tax reform done in a meaningful bi-partisan way, then there is room to go on the upside because I think the market is pricing in only a 65/35 chance it does at this point. By meaningful I mean less than 25% corporate tax rate with a one time repatriation holiday at 10% and a cut in individual taxes ideally without a border-adjusted tax,” said Ian Winer, head of equities at Wedbush Securities.
On the other hand, there is a strong case to sell stocks since tax reforms could fail given the difficulties over repealing and replacing Obamacare and tax cuts are not possible without a BAT, he said.
According to Goepfert, the NYSE Advance/Decline Line is climbing even while the S&P 500 is moving lower. The rise in the Advance/Decline Line, which tracks the number of advancing stocks minus the declining shares each day and adds that to the figure from the previous session, indicates a positive trend.
“The only times the S&P showed a loss over the prior month while the A/D Line rose at least 1% and hit a multiyear high during the month were in April 2014 and April 2016. Both led to nice rallies over the next few months,” he said in a report.
However, Chris Kimble, founder and chief executive of Kimble Charting Solutions, had a different take on the market.
Kimble believes the Dow Jones Transportation Average DJT, -0.32% a bellwether for the U.S. economy, may be forming a bearish pattern similar to the ones observed in 1998-99 and 2007-08.
“The bulls will need the transports to blow through the red resistance line to breathe a sigh of relief. If not, it could spell trouble for the transports,” he wrote in a blog post.
In his chart, he pinpointed 9,109 as a key support level.
“A break below this line would be the first warning to investors,” he said.
The index closed at 9,104.81 on Friday.
source: Bloomberg
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