MoneyShow's Jim Jubak thinks the prevailing market psychology/strategy/wishful thinking is that asset prices are headed upward until the Fed signals that interest rate increases are six months away.
In the last two days, we've had a retreat in US stocks on anxiety about earnings and then a move ahead on-well, on what exactly?
Not on better than expected earnings from Alcoa (AA) after the close yesterday. It's been quite a while since the results at the commodity producer have been a market leader even if the company's report does mark the unofficial start of the earnings season each quarter.
No, I think what we saw yesterday was some quick profit taking after the Dow crossed 17,000 for the first time ever before the Fourth of July holiday and then some quick buying today on hopes for a quick bounce in momentum stocks that had dropped by 6% the day before.
In other words, I don't think the action of the last few days shows much of anything for the US market over the long-term of two or three weeks.
That's especially the case since speeches by Fed chair Janet Yellen and other Fed governors in the days before today's release of the minutes from the last meeting of the Federal Reserve's Open Market Committee took any chance of misinterpretation away. Only if you were completely asleep last week, could you find anything even vaguely disconcerting in today's minutes about the Fed's June discussion of asset bubbles. Yellen's remarks of July 2, for example, made it very clear the Fed didn't intend to raise interest rates in order to pop a bubble in asset prices.
The first real measure of the level of market anxiety about earnings starts on Friday when Wells Fargo (WFC) reports and then continues into next week with reports by JPMorgan Chase (JPM), Citigroup (C), and Goldman Sachs (GS.)
The market is expecting very weak reports from financials this quarter-especially from the big banks on a plunge in trading revenue. JPMorgan Chase, for example, back on June 14 told analysts to expect a 20% drop in trading revenue for the quarter. The bank is projected to report $1.30 a share this quarter down from $1.60 a share for the second quarter of 2013.
Of course, since this is widely anticipated, it's unlikely that actual earnings that are only as bad as expected will have a big effect on the overall market. It would take something unexpected to have that effect and given low expectations I think we're actually like to see financials hold steady or even advance on earnings if the reports are even a bit better than expected.
If you're looking for earnings that could have a significant downward effect on the market, I think you'll have to look out further to Google (GOOG), Facebook (FB), Tesla (TSLA), Twitter (TWTR) and other new wave market favorites for that. These are the stocks that have shown the ability to drop 6% in a day.
But even here it's not clear to me that the entire market would follow these names down on disappointing results. We've been through this with these stocks back in May and the lesson of that drop is that 1) it will be temporary, and 2) buying on the drop works.
To put a serious dent in the market's upward trend, I think we need something that will shake the belief in an improving US economy in the second quarter and indeed in the second half. I doubt that this quarter's earnings report has the leverage to turn that trick.
The market may not be headed higher very fast in the next few weeks but I think the prevailing psychology/strategy/wishful thinking is that asset prices are headed upward until the Fed signals that interest rate increases are six months away.
Of course, that assumes that traders and investors will be able to see the signals of that turn.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and as I do I'll disclose my positions here.
