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What the Market Wants: Q1 Earnings Season Begins

Posted on the 12 April 2011 by Phil's Stock World @philstockworld

What the Market Wants:  Q1 Earnings Season BeginsThe market dilly-dallied around last week, moving a point or two up one day, a point or two down the next, waiting apparently for this week’s launch of the Q1 earnings season. The end result was in general slightly negative, with the S&P 500 down about -0.35% for the week.

The VXX, the forward looking “fear indicator,” was flat, while the VIX itself was up a tad with a very low reading of 17.8. This would indicate little fear in the market, despite all the global concerns, but I don’t think investors are ignoring the tragedy in Japan or the turmoil in the Middle East; it’s just that there’s no other place to put their money. QE2 continues to pour money into Treasuries; low interest rates are driving money out of bonds; real estate is moribund and illiquid; short sellers are covering . . . where else can investors go? The stock market, after all, has had two years of growth and strong earnings, and that in itself is enough to attract investors.

The first major earnings announcement for Quarter 1 took place today, with Alcoa (AA) beating its estimates by a hair:  +0.28 versus the expected +0.27, but its revenues were disappointing. Bellwethers reporting this week include JP Morgan (JPM) on Wednesday, Google (GOOG) on Thursday, and Bank of America (BAC) on Friday.

There is a plethora of fairly important economic releases due this week. On Tuesday we will have the trade balance, import/export prices, and the Treasury budget report. On Wednesday we get business inventories and retail sales (which the market appears to assume will be good, based on last week’s activity). Thursday will bring the producer price index (PPI) and the weekly initial jobless claims, which continued their improvement last week. And Friday, we’ll have some particularly important announcements with industrial production, Michigan sentiment, and the consumer price index (CPI). The PPI and CPI, of course, will show us any spikes in inflation. 

Market stats. Of the cap/styles, Large-cap Value did the best, losing only -0.25%, while Mid-cap Value did the worst, down -0.91%.

Click here to see the market stats.

Our SectorCast did very well last week, forecasting that Basic Industries and Health Care would be on top, and they were. Energy and Utilities finished third and fourth, swapping places with the SectorCast projections. Transportation was in last place, as projected, with Consumer Durables in 8th place, rather than 9th place as forecasted. The only real surprise was Consumer Services, jumping into 6th place instead of the forecasted 10th. We can attribute that to last week’s positive comments from retailers, which will perhaps foreshadow good news from the retail sales numbers due out on Wednesday.

From a commodities viewpoint, oil was up a bit, which was reflected in the poor performance of the Transportation Sector. The dollar fell about 1.5% while the Euro gained 2% despite Portugal’s request for aid.

Our forward looking SectorCast model points toward a continuation of success for Basic Industries, Energy and Health Care. There still seems to be a slight bias toward small-caps, but I’m not sure how important cap or style is in this market. The sectors to avoid would be Transportation, Finance, and the three consumer sectors.

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