Happy weekend folks!
For me Saturday is a time to catch up on the week’s events and charts. I rarely look at a price chart during the week… as most of it is just more noise.
Our job is to filter the noise and focus on bigger, broader more meaningful trends.
And excluding Australia – I am encouraged by what I see.
Now if you want you share of constant negative news and reasons why the Dow Jones should be trading for “less than 10,000” as opposed to above 20,000 – tune into Zero Hedge or The Daily Reckoning.
They will fill your bearish boots until your heart’s content.
Very few ‘macro guys’ (like me) are willing to argue why stocks are still a good bet. It’s almost a contrarian view as stocks hit record highs.
But it doesn’t stop the drumbeat of ‘doomsday’ calls.
As an aside, it overlaps very much with what I was saying the other day about having a “fixed” mindset and refusing to accept you could be wrong.
Their argument is typically that stocks are irrationally priced and/or too optimistic.
I don’t buy it.
For example, take a look at what we see with the yield of 5-year TIPS.
Today this trades at just 0.15%
For those not familiar, this level suggests the market is pricing in weak growth over the next five years.
Hardly what I could overly optimistic.
Now let’s look at what we see with the VIX:
The VIX is sitting at record lows…
Now if things like (but not limited) North Korea, a crashing China, a reckless Trump, weaker than expected earnings, Fed monetary tightening or a dysfunctional Washington DC worried the market — this would be trading dramatically higher.
Traders would be buying protection – which would send the VIX north.
But guess what – they aren’t.
Trust me, if the market begins to nervous about any macro event, we will see the VIX move up a gear or two.
Profits Surprise on the Upside
Earlier this week I made the comments that earnings so far this quarter are largely beating expectations (again).
Quarters 1 and 2 are far exceeding expectations… and perhaps a large part of why stock prices are being pushed higher. Below is Factset’s summary:
To date, the market is rewarding upside earnings surprises less than average, but also punishing downside earnings surprises less than average.
Companies that have reported upside earnings surprises for Q2 2017 have seen an average price increase of +0.2% two days before the earnings release through two days after the earnings.
This percentage increase is below the 5- year average price increase of +1.4% during this same window for companies reporting upside earnings surprises.
Companies that have reported downside earnings surprises for Q2 2017 have seen an average price decrease of -1.4% two days before the earnings release through two days after the earnings.
This percentage decrease is smaller than the 5-year average price decrease of -2.4% during this same window for companies reporting downside earnings surprises.
Percentage of Companies Beating Revenue Estimates (77%) is Above 5-Year Average
In terms of revenues, 77% of companies have reported actual sales above estimated sales and 23% have reported actual sales below estimated sales.
The percentage of companies reporting sales above estimates is well above the 1- year average (56%) and well above the 5-year average (53%).
5.0% YoY Revenue Growth
Factset added the blended (year-over-year) revenue growth rate for Q2 2017 is 5.0% — led by the energy sector.
The only sector projected to report a decline in revenues is the telecom services (time to move away from ‘dumb-pipes’ folks)
Now, if the energy sector is excluded, the blended revenue growth rate for the index would fall to 4.0% from 5.0%.
And below we have profit margins by sector:
Yes folks, real money is being made.
With that, let’s see how all this translates in terms of the longer-term weekly trend (and price action). As that’s all that matters…
S&P 500 – Weekly Chart
Another week – another record high!
I sound like a broken record. But as I like to say “higher highs beget higher highs”.
Such is the nature of trends and why we stick with them…
What I am watching most closely here is the potential breakout of this (narrow) 22-week distribution.
The market has been trading in a tight-band of late but could be breaking to the upside.
Probabilities would suggest this is more likely to be the case given the strength of the current trend. And as to whether we see a pullback to the 35-week in the near-term – I don’t know.
I would not be surprised and if we did – it’s a great opportunity to buy.
I think a combination of strong earnings this quarter – and dovish language from the Fed – has given the market the “juice” it needs to leg higher.
And for what is the 69th consecutive week – let me repeat that it’s premature to short this market.
Putting it All Together…
Whilst things aren’t great – they are nowhere near as bad as what many would have you believe.
Remember: fear selling is the oldest trick in the book.
The likes of Zero Hedge (and numerous others) will go out of their way to only focus on what’s negative.
I doubt they have placed one long trade since 2008. Shame.
What’s important is to maintain a balanced perspective.
There are always positives and negatives in any market. Today the positives outweigh the negatives in the case of the US – both in terms of the data and the tape.
However, with respect to Australia, I would argue it has many more economic challenges.
Speaking of which – tomorrow we will take a look at the XJO. It had a bearish week however our weekly trend remains bullish… completing its 64th consecutive week.
… trade the tape
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