Stocks Higher for Second Consecutive Week
Most global stock indices closed higher on the week, with the FTSE 100 rising to levels not seen since the middle of 2011 and the S&P 500 closing at its highest mark in 5 years. These moves were fueled by general investor optimism for the fourth quarter corporate earnings releases that are now being made available, and this was also helped by improved Chinese export data that came in higher than analyst estimates. This balance between positive stories in both developed and developing economies propelled the S&P 500 to a close above 1470, while the FTSE 100 is now seen closing in on 6100.
Now that the Fiscal Cliff story is largely behind us, it has become clear that traders are now focused on the numbers we will see in corporate earnings. In the post-holiday period, these numbers are expected to be strong and in order to get a suitable analysis of where markets are likely to head next, we will need to spend time looking at the performance activity seen in individual companies. But the fact that we are seeing positive moves is significant because markets are now returning to normal trading volumes, and the upward moves now indicate that the general majority sentiment amongst traders is positive (suggesting further gains).
Alcoa and Wells Fargo Kick-off the Earnings Season
The unofficial opening for this earnings season kicked off this week with the fourth quarter results from aluminum producer Alcoa (AA), and this was followed by the scheduled release from Wells Fargo Bank (WFC) on Thursday. Both of these reports were positive and this has matched the general trend we have seen in earnings performances thus far. Twenty-seven companies in the S&P 500 have released earnings, with 81% of these reports surpassing analyst estimates and 67% of these reports showing an increase in profits. More broadly, analysts have forecast that corporate earnings releases will result in profit gains of 2.5%.
But with these relatively dismal projections (a 2.5% increase would be the lowest rate since 2009), it will be less difficult to generate upside surprises. These factors will be critical for gauging future direction, as markets are already trading at elevated levels following the favorable outcome to the Fiscal Cliff story. The S&P 500 has rallied nearly 9% since November, so traders will need to watch earnings releases as they unfold in order to determine whether or not this momentum can continue. Next week’s earnings calendar is a busy one, so spread betters should watch for reports from Bank of America, JP Morgan, Citigroup, General Electric and Intel.
The FTSE 100 is the chart to watch this week, as prices are now coming into major historical resistance in the 6080 region. Prices are likely to encounter some sell orders in this region, so near term short positions can be taken into this price level. Stop losses should be kept tight however, as a break above 6080 should be forceful. Longer term, the outlook is still bullish as long as we don’t see any major retreats without a 6080 break.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.