Earnings Season Off To A Good Start. Stocks Should Rebound Late In the Day.

October 10, 2012

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Earnings season has officially kicked off and the first bite from the Apple tastes pretty good. Alcoa said revenue growth will decline by 1% (prior forecast 7%) and that was better than feared. Yum and Costco knocked the cover off the ball and both stocks are rallying. Earnings releases will be the next catalyst.

Over the last month, many companies have warned and expectations are low. Revenue growth will be light and guidance will be cautious. Normally, this would weigh on the market. There are a number of other factors that make equities and attractive investment.

The dividend yield on the S&P 500 is 2% and that is better than the yield on 10-year treasuries (1.7%). Stocks are trading at a forward P/E of 14 and cost-cutting will preserve profit margins. Balance sheets are strong and any incremental revenue growth will go straight to the bottom line. For these reasons, Asset Managers will rotate out of fixed income and into equities.

Most analysts are calling for a 3% correction. They plan to buy that dip, but I don’t believe they will get it. Support at SPY $143 held two weeks ago and it will be tested this week. After these earnings jitters disappear, the bid will strengthen.

European credit concerns have subsided and that provides a strong backdrop for financial stocks. Spain will request aid and Greece will get its next payment. This Friday, Wells Fargo and J.P. Morgan Chase will release earnings. I am expecting strong numbers and a good reaction.

The earnings scene next week will be dominated by big banks and mega cap tech. Financial stocks performed well last quarter and they will push higher. Tech has been badly beaten-down and Intel, IBM, eBay will spark buying.

Asset Managers will not get the dip they hoped for and they will aggressively bid for stocks. They don’t want to miss a year-end rally.

Central banks around the world are easing. China provided a massive liquidity injection this week and they will continue to ease right through their upcoming leadership change. They will also initiate fiscal spending programs because they want to make sure the transition (once every 10 years) goes smoothly.

US economic releases were strong last week. Activity is starting to rebound and we won’t have any major releases for a couple of weeks.

I know that it is difficult to weather a 13 point S&P decline, but that is why I have been encouraging you to scale in. This is a buying opportunity and you have a chance complete your purchases at a better price level. I am still holding off on the remaining 25% of my allocation. I want to see the reaction to Wells Fargo and J.P. Morgan Chase on Friday. If these stocks rally, I won’t hesitate to complete my positions.

As long as SPY $143 holds, I won’t think twice about my logs. My ultimate stop out point is SPY $140. I don’t believe we will get anywhere near that level.

The market pulled back on earnings concerns yesterday. Asset Managers pulled bids early in the day. Once the momentum got going, there was a buying boycott. There wasn’t any news to justify the decline, just nervousness ahead of AA, COST and YUM. The news was encouraging and I expect to see a rally today.

Maintain your long positions and look for opportunities to add.
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