Market Direction Week of August 15, 2016

Market Direction: BULLISH alert issued 6/2/2016

Last Week Review: All 3 major indices hit record highs on Thursday (8/11) but with few catalysts in sight, negative earnings growth, stagnant inflation, high valuations and weak retail sales, further upside may be a big challenge.

While a rebound in oil prices back to the mid 40’s or above (WTI crude) could provide some lift to equities, with the market already at record highs, additional upside is likely to remain very limited, even though near-term downside risk also remains relatively low.

Q2 earnings season is nearly over and with about 90% of the companies in the SPX reporting, below are the aggregate results so far. As you can see, the results versus estimates are very much in-line with Q1, but this does not tell the whole story.

According to Factset Research, year-over-year earnings growth in Q2 was -3.5%; making Q2 the 5^th consecutive quarter of negative earnings growth. While losses in the energy sector account for most of the decline, the energy sector only makes up 7% of the S&P 500 index. Among the companies that provided earnings guidance for Q3, 67% have guided lower and as a result, the year-over-year earnings growth estimate for Q3 is -1.7%.

How the market finished last week, the S&P 500 up 0.1%, the Nasdaq up 0.2%, and the Dow up 0.2%.

This Week: It was a fairly busy week for economic reports and as you can see, the results were mixed. While next week’s economic calendar is fairly light, with earnings season nearly over, July CPI, Industrial Production and Capacity Utilization are likely to put the focus back on when/if the Fed might raise rates again.

Expectations from the Bank of Japan remain heightened after a somewhat minimal degree of action taken last time around. Could Monday’s Q2 GDP reading force their hands once more?

Finally, the Walmart figures will provide a key insight into consumer behavior, as investors seek an insight of how the business is faring in light of its agreed takeover for Jet.com.

Economic Calendar: Consumer Price Index (8/16), Industrial Production (8/16), FOMC Minutes (8/17), Leading Indicators (8/18)

Some of the major earnings announcements on deck: HD, AAP, TJX, CSCO, LOW.

 

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