Will earnings season throw markets for a loop?
Our suspicion is the markets have priced in a robust earnings season that is just around the corner. However, should earnings reports only meet or possibly miss, we believe the downside reaction might be more than would otherwise be expected.
Nevertheless, there is nothing onerous on the charts or in the data to alter our opinion that the near-term uptrends of the indices should continue to be respected.
All of the indices closed higher Tuesday with positive internals on the NYSE and Nasdaq as volumes rose above prior levels on both exchanges. One new closing high was achieved but we would note several of the charts are extended above their respective support levels and 50-day moving averages. Nonetheless, the near-term uptrends remain intact and should be respected until proven otherwise.
The Dow Jones Industrial Average, above, made a new closing high while the Dow Transports, below, managed to close back above its near-term uptrend line that had been violated at the close of Monday's session. All of the near-term uptrend lines remain intact as do the uptrends of the cumulative advance/decline lines for the exchanges.
The data remains mixed an inconclusive. All of the McClellan 1-day OB/OS Oscillators are neutral with the 21-day readings overbought (All Exchange:+14.89/+69.91 NYSE:+5.44/+71.04 NASDAQ:+25.94/+75.27). The Equity Put/Call Ratio (contrary indicator) is a bearish 0.54 while the Total (0.73) and OEX (1.24) Put/Call Ratios are neutral as is the Open Insider Buy/Sell Ratio at 50.1.
The new AAII Bear/Bull Ratio remains neutral at 29.0/36.0 while the new Investors Intelligence Bear/Bull Ratio (contrary indicator) has turned mildly bearish at 17.0/55.5.
Forward 12-month earnings estimates for the S&P 500 from Bloomberg of $137.37 leave a 5.56% forward earnings yield on an 18.6x forward multiple, a 15-year high.
With the forward valuation of the S&P 500 at a 15-year high and several charts well above their respective support levels and moving averages, should earnings not meet or beat expectations, some trouble may ensue.