Will Record Earnings Be Good Enough?

July 16, 2019
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - A light news cycle favors momentum and stocks are inching higher each day. Intraday ranges are tight and the volume is low. Traders will focus on earnings the next few weeks and Q3 guidance will determine direction for the rest of the summer. Big banks will dominate the scene this week. Yesterday Citigroup posted results and the stock was down slightly. The market needs help from the financial sector for the market breakout to hold. Goldman Sachs, J.P. Morgan, Wells Fargo and Charles Schwab will report earnings before the open. Lower interest rates will be a drag on earnings, but it will be offset by strong employment (good for credit). Mega cap tech stocks have been leading the market rally and much of the gains are very concentrated in a handful of names (Amazon, Apple, Facebook, Google, Microsoft and Netflix). These companies could face a stiff headwind as antitrust hearings commence this week on Capitol Hill. Sellers typically wait for these companies to report before they reduce risk and the market bid is strong the first few weeks of the earnings cycle. Stocks are trading at a forward P/E of 17 and there is not much room for error. The Fed will cut rates a quarter point in two weeks and that news is priced in. The market is addicted to easy money and it will look for another fix (rate cut) during the FOMC meeting in September. Three rate cuts are projected this year and I believe that is overly optimistic if the market treads water at this level. It will take a fast market drop to prompt this level of action. China's economic numbers were good yesterday. GDP was in line, industrial production was better than expected and retail sales were solid. This will take some of the pressure off of China during the trade negotiations. Trade officials are negotiating by phone and this is a sign that US/China trade talks have stalled. It's not worth anyone's time to get in a plane and both sides are miles apart. Mnuchin said that if phone conversations go well this week they might schedule a face-to-face meeting. The market might not even care if a trade deal happens. Tariffs will slightly reduce growth in both countries but it won't be devastating to the economy. Consumers might not feel much of a pinch since China will subsidize industries and devalue their currency to make their products cost competitive. I don't believe we will see a trade deal before the 2020 election. Swing traders should stay in cash. Earnings will be solid and profits will hit record levels. Comps will be difficult given that growth was fueled by tax cuts a year ago. Earnings growth rates will decline. I believe that it will be difficult for the market to tread water at current levels. Investors typically get spooked when politicians flee the capital in August. We could hit the debt ceiling in a few weeks and we can expect a last second Band-Aid. Supposedly Republicans and Democrats are close to a deal, but we have heard this before. Day traders should watch financial stocks today. They will determine market direction. The bid is tested each morning and once support is established there is a nice bounce. Look for stocks that have relative strength and set passive targets. It's very difficult to find momentum when there is no market tailwind. The market won't move much, but at least we have individual stocks to trade during earnings season. Option Stalker has many earnings searches that help us identify opportunities. I will be traveling Wednesday to pay my respects to a dear family member who passed suddenly Sunday and I will not be posting market comments tomorrow. . . image

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