Weekly Update

Markets on the cusp of …?

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Published October 7, 2016


October is crunch time for this stock market. Investors have been waiting all year for signs of a resumption of growth in corporate earnings. The slide below from JP Morgan displays the projections for a substantial uptick in that growth (see the brown-green bars of analyst projections marching upward).

Chart 1: Corporate earnings should resume growth with this month’s reports

Corporate earnings should resume growth with this month's reports

Energy earnings, which have been falling in response to lower oil prices over the past two years, are set to rebound as the price of oil has shown signs of recovery.

Chart 2: A rebound in energy earnings will fuel the resumption of growth in earnings

A rebound in energy earnings will fuel the resumption of growth in earnings

Chart 3: Oil prices stopped falling and recently rebounded

Oil prices stopped falling and recently rebounded

Recent talk of a deal to control oil supply has firmed up oil prices despite a surge this week in the U.S. dollar as rising interest rates draw ever-nearer. Oil companies are perhaps putting the damaging oil oversupply problems in the rearview mirror, their decline in earnings abating and comparisons to the prior year’s depressed earnings levels beginning to look positive.

Should this scenario of a renewed upward thrust in earnings play out, stock prices might be well for the remainder of the year. If this growth in earnings scenario does not pan out, however, expect stock prices to feel some pain near-term waiting for another catalyst to push shares upward.

For our purposes here at TimingCube, we are focused on the Nasdaq 100 (QQQ) stock index, which has been relatively strong and contains almost no energy-related stocks. We count on our models to guide us without emotion and only pay attention to the movement of stock market price with no input for speculation on the economy or oil prices. That’s proven to be a winning approach to us for over 15 years now.

Follow-on: Market outlook

Speaking of the outlook for the stock market, we found this opinion/analysis from Envestnet’s Tim Clift to be particularly good at framing the current state of things:
U.S. stock market’s “complacency” is about to end

Market Update

Stocks continued trading this week within their recent range while awaiting earnings or some new information to break them out of the range. After three weeks of positive but reluctant movement, this week gave us a slight dip. Monday saw little news other than continued reaction to the recent Deutsche Bank (DB) wrestling with a hefty fine from the U.S. Department of Justice. Adding to that this week was news out of the UK that Prime Minister May will invoke Article 50 of the Lisbon Treaty where the UK pursues leaving the European Union. Of course, this will be an extremely lengthy process. But the news affected trade mostly in the British Pound currency which accelerated its slide.
Monday’s -0.3% slip in stocks gave way to a -0.5% fall Tuesday with the U.S. dollar jumping on news that the European Central Bank (ECB) might be nearing an end to its relaxed monetary policy. With the U.S. dollar pushing higher due to the ECB talk as well as upcoming interest rate hikes in the U.S., gold got slammed along with rate-sensitive sectors like utilities and real estate. Interest rates ticked higher Wednesday and Thursday though stocks took it in stride buoyed by higher oil prices and strength in financial shares to rebound +0.4% Wednesday with Thursday’s session flat. Friday brought the monthly employment report which came in consistent with expectations but showed the highest annual wage growth in seven years. As wages are by far the single greatest contributor to inflation, the report reaffirmed expectations of a December Fed interest rate hike. Stocks struggled with that news early on Friday but recovered later in the day to a -0.3% loss.

Warm wishes and until next week.