U.S. Stocks Are Teasing a Breakout as Earnings Loom

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American investors have been sort of left out of the stock market party so far this year, watching from afar as equities in China, Japan and Europe have soared thanks to currency effects and the impact of cheap money stimulus. While the U.S. dollar has been a big winner, the NYSE Composite Index remains mired in a trading range going all the way back to July.

That’s right: Nearly a year of churning, turbulent action without much to show for it.

But that could be set to change.

Friday Snapshot

nyse

On Friday, stocks rallied to nudge up against this major resistance level — threatening a breakout as the Q1 earnings season kicks off. The Dow Jones Industrial Average gained 0.6%, the S&P 500 gained 0.5%, the Nasdaq Composite gained 0.4%, and the Russell 2000 gained 0.4%.

The catalyst is the growing realization that recent softness in the economic data — specifically inflation measures and the March payroll report — is likely to push back the timing of any Federal Reserve interest-rate hike until September at the earliest. There is growing chatter that an early 2016 rate liftoff is the most likely outcome.

Minneapolis Fed President Narayana Kocherlakota, who is admittedly one of the biggest policy doves to perch within the walls of the Marriner Eccles building, buffed these expectations on Friday by saying the Fed should wait until the second half of 2016 to raise rates.

He added that he doesn’t expect inflation and employment to hit the Fed’s targets for three years and that increasing the cost of money now would take the economy in the wrong direction, reducing borrowing and spending at a time when signs of consumer confidence are starting to appear.

As a result, investors are piling into pro-cyclical areas of the market that have recent fallen into short-term oversold conditions, including energy and semiconductors.

OIH

The former — which Edge subscribers are exposed to via the Market Vectors Oil Services ETF (NYSEARCA:OIH) — is lifting on some stabilization in crude oil prices on expectations of a rebound in global demand and looming U.S. shale production cuts.

The latter is being helped by M&A activity involving Intel Corporation (NASDAQ:INTC) as well as anticipation of a supply chain restocking ahead of the launch of Windows 10 from Microsoft Corporation (NASDAQ:MSFT) later this year. That has helped Edge Pro subscribers earn 30%+ on their April $32 INTC call options.

Whether a breakout can happen will depend in large part on the flow of upcoming earnings.

What to Look for Next Week

Expectations have been greatly diminished heading into the reporting season as executives have warned of the drag from the strength in the U.S. dollar (which reduces the value of foreign profits) as well as the comedown in energy prices (which will hit energy earnings hard).

According to FactSet, earnings are expected to fall 4.8% on a year-over-year basis in the first quarter. If that happens, it would be the worst result since the third quarter of 2012. Some 85 companies in the S&P 500 have issued negative guidance vs. 16 issuing positive guidance.

Yet, the optimists say this game has been played many times before: Negative guidance lowers the hurdles, making upside surprises and post-earnings stock price gains easier.

Although Alcoa Inc (NYSE:AA) unofficially kicked the Q1 reporting season off on April 8, the volume of action will pick up in the week to come with financial, technology, and industrial names prominently featured.

  • Tuesday: JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) before the bell (preview here), Intel after the close.
  • Wednesday: Bank of America Corp (NYSE:BAC) before the bell, Netflix, Inc. (NASDAQ:NFLX) after the close.
  • Thursday: Citigroup Inc (NYSE:C) and Goldman Sachs Group Inc (NYSE:GS)
  • Friday: General Electric Company (NYSE:GE) (More news here.)

On the economic front, industrial production, retail sales, housing data and the March CPI inflation report will be closely watched. Overseas, a batch of data out of China including industrial production and GDP could provide more fuel to the rapidly building stock bubble there, while industrial production numbers are also due out of the eurozone.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/u-s-stocks-are-teasing-a-breakout-as-earnings-loom/.

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