What if Earnings Aren’t Enough?

The theme that’s starting to permeate this market is “what if earnings aren’t enough?”  So far the SP500 has, on average, exceeded Wall Street earnings estimates by around seven percent.  Yet stocks, after beating estimates, haven’t popped.  In fact, it seems the downside penalty this season has been about three times harsher than the upside reward a company receives for an earnings beat.  So what gives?

One theory is that investors are starting to look further down the road as far as earnings go.  Will earnings keep climbing, or was last quarter the end of the good news?

Another theory is that markets are still highly valued on a multiple basis even with the higher earnings.

Both may be true.  The technical signals are a mixed bag right now.  While support for the SPX has held up around the 200-day moving average, so far the index has failed to reach escape velocity and break out above the 50/100 dma’s.  In fact, the 50dma is currently below the 100dma.

These mixed signals, unfortunately, give little indication the market is going to break out to the high side — even with the strong earnings season.  It seems the focus has shifted to ‘everything else’ as investors remain uncomfortable with wear we are deep in the bull market cycle.

Interestingly, the base case from the beginning of the year — with a minimum price target of 2890 — is still on the table.  Some analysts have started to downgrade their expectations for the year though.  2890 is pretty low compared to many estimates out there (to be fair, our ‘minimum’ price target isn’t what’s expected.  We have a more likely target of 2940 on the chart as well – and several projections that were over 3000).

Since last week was a complete wash (SPX opened at 2670.10 and closed at 2670.14), the key for this week will be to see if we trade outside of last week’s trading range.  This puts the low at 2660 and the high at 2717.  A daily close above or below either of these levels would be an indication of directional bias (though a break-out to the high side would be more significant — a drip below 2660 just means we could test the 200dma again).

The markets are still in search of a catalyst.  Until something changes, look for the sideways trend to continue.

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