Debt Ceiling Agreements and Strong Corporate Earnings Send Stocks Higher

Strong Corporate Earnings Send Stocks Higher
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January 21, 2013 By: , No Comments


Stocks moved higher into the close of the week on the positive sentiment created by a proposal by US legislative bodies to temporarily raise the country’s Debt Ceiling, and the better than expected outcome for a number or corporate earnings releases that came during the week. Two of the bigger corporate earnings stories came from General Electric (GE) and Morgan Stanley (MS), which posted rallies of nearly 4%. These rallies helped support stock markets as a whole because the disparate nature of the industries is now showing that earnings strength is broad-based. Nine of the 10 S&P industry sectors rose on the week, with Industrials stocks posting the best group performance.

The S&P 500 finished Friday at 1486, while the Dow Jones Industrials close just below 13,650 (which is its highest closing value in 5 years). Trading volumes were roughly 7% above their three month averages, helping to add credibility to these stock rallies. But these encouraging moves are being balanced in the minds of some investors by the fact that economic data is recovering at a sluggish pace. Because of these opposing factors, we will need to see continued strength in corporate earnings and streamlined agreements

Stocks Closing In on All-Time Highs

To gain some perspective of the price valuations currently seen in stock markets, the S&P 500 is now only 5% below the record highs of 1565 (posted toward the end of 2007) and the Dow Jones is even closer to its all-time marks of 14,165 (currently lower by 4%). It should be noted, however, that these rallies are global in nature, with the DAX moving to the highest values since 2007, the Nikkei 225 coming sharply off its post-tsunami lows, and the FTSE 100 trading at levels not seen in 2 years.

Short term, most of the attention in the spread betting community is being centered on corporate earnings, with nearly 75% of the reporting companies in the S&P 500 beating earnings estimates. We are still early on in the season, however, as only 67 of the 500 index companies have made their fourth quarter profit records public. These better than forecast performances have led to many upward revisions in analyst estimates, and the broader market is now expected to show earnings growth of 3.8% for the fourth quarter. Prior to the start of this season, these expectations called for growth of 2.5%. So, these changes in expectations will now leave markets open to downside vulnerability if the remainder of the earnings releases fail to meet this positive trend. Next week will see decreased trading volumes on Monday, with US markets closed for the Martin Luther King holiday.

Technical Perspective

The FTSE 100 has pressed into the 6080 resistance level we have written about previously and with the strong close in this area (and lack of selling pressure evidence in this region), it is highly likely that this level breaks early next week. Given that there will be stop losses from weak short positions, the break should lead to a short term rally but wait for prices to drop back to support at 5970 before re-entering into long term spread betting buys for the FTSE 100.



About Richard Cox

University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.


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