Market Direction Week of January 13, 2019: Earnings In Focus

Market Direction: BULLISH alert issued 10/24/2019



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Market Direction Week Review: Following the US assassination of Iranian commander Qassem Soleimani and the subsequent Iranian response which involved no casualties, tensions fell as both sides backed away from further retaliations. Historically military conflicts such as this result in short-term spikes in volatility, the price of crude oil (when the Middle East is involved), gold, defense stocks, and Treasuries. Likewise, they often create short-term drops in equities, and this time was no exception. However, as history often repeats itself, eager traders bought the dip aggressively and reversed all of those trends within just a few days. This is not terribly surprising given the equity markets have not experienced a drop greater 7% in more than a year. 

Following a couple weeks of speculation, on Thursday (1/9) China finally announced that Vice Premier Liu He will indeed be coming to Washington DC on 1/15 to sign the phase one trade agreement. President Trump has stated that he would be traveling to Beijing shortly after that, to begin negotiations on phase two, though he also said he thinks it might be best if he waits until after the November election to sign the deal; assuming, of course, that the terms can be agreed upon by that time. So this basically means that the markets can only count of the current tariffs to stay as they are, for the next 10 months. While valuations are a bit stretched at the moment, continued gains are possible, especially if earnings growth improves. 

Following the US/Iran military conflict this week, British Prime Minister Boris Johnson called for a de-escalation from all sides, French President Emmanuel Macron and German Chancellor Angela Merkel urged Iran not to abandon the 2015 nuclear accord and encouraged Iraq to continue to support the effort to minimize the expansion of the Islamic State. These positions aren’t too surprising as our European allies have historically supported a strategy of constructive engagement with Iran, rather than the strict containment effort employed by the US. And while it does seem that tensions are easing at the moment, if this issue flares up again the 3 most powerful leaders in Europe will likely find themselves in the difficult position of deciding whether to support the US or accept the potential consequences if they don’t.

Separately, European Commission President Ursula von der Leyen said this week that the EU is ready to work toward a deal of “unprecedented scale” with the UK, though she warned that in a post-Brexit era, it would be impossible for the relationship to be as close as before. She also reiterated a familiar refrain that “Without free movement of people, you can’t have free movement of capital and goods”, and saying there will be no compromise on the Customs Union. The current Brexit deadline of January 31^st was just approved by lawmakers (330 - 231) on Friday (1/10), so it looks like a firm date has finally been set. 

How the market finished last week, the S&P 500 up 0.9%, the Nasdaq up 1.8%, and the Dow up 0.7%.

Market Direction This Week: We track the stock market based on our Bullish and Bearish Alerts a new Bullish Alert recently started on 10/24/19 and we suggested to our followers they can trade any new long positions based on are model. We will continue to provide you the current stock market conditions as they develop. The current stock market environment is in an uptrend (see Market Direction Mid Week Update: Trading Strategies). 

“Earnings are beating by 4.9%, with 78% of companies exceeding their bottom-line estimates. This compares to 5.4% and 71% over the past 3 years,” Credit Suisse strategist Jonathan Golub pointed out in a note Friday.

While earnings season has been off to a positive start with big banks delivering solid results, some strategists warn that it is too early to brush off concerns of negative earnings growth. “As any seasoned runner knows, an aggressive pace out of the gate may be difficult to maintain,” Raymond James Chief Investment Officer Larry Adam wrote in weekly note to clients Friday. “As we cautioned last week, headline earnings were expected to decline 4% year-over-year (YoY) in 3Q19, and although earnings typically beat estimates by ~4%, it is likely to ‘come down to the wire’ on whether or not we can skirt negative earnings growth. The next two weeks should provide additional insights, as 284 companies representing ~66% of the market capitalization of the S&P 500 are set to report.”

Adam explained that the tech sector will be a key group to watch this earnings season and reiterated the firms positive outlook on the sector. “There are growing concerns that the slowdown in global economic momentum and the US-China trade war could start to impact the [tech] sector’s earnings,” Adam noted. “Earnings expectations were revised lower by 1.46% in the preceding three months, but that is substantially less than the 3.87% downward revision for the broader market. Over the last ten quarters, the Technology sector has seen the second largest earnings beats at 6.8% and we expect similar success this quarter. Headline risk (e.g., anti-trust debate) could present an opportunity to add exposure, and we maintain our positive outlook on the sector as it has historically been the top performer in an ‘insurance’ rate cut environment.”

Economic Calendar: CPI (1/14), PPI (1/15), Retail Sales (1/16), International Trade (1/16), University of Michigan Consumer Sentiment (1,17)

Some of the major earnings announcements on deck: JPM, UNH, CSX, MCD, AMZN.

$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Building a community of investors one trade at a time. Share with a friend. Cha-ching!

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