Earnings season starts this week when Goldman Sachs (GS) , Wells Fargo (WFC) , JPMorgan Chase (JPM) , and Bed Bath & Beyond (BBBY) report on Wednesday morning. It is primarily financials on the docket this week before technology names start to report the following week.
With the major indices at all time highs as recent inflation fears have subsided, there is some concern that the indices are technically overbought. Fed Chairman Powell offered some market-friendly comments last week, but the market is still skittish about how a surge in economic growth will impact interest rates.
The critical issue for the market going forward is rotation. Since mid-February, big-cap technology and FATMAAN names have regained their leadership. The speculative small-caps that were leading a frenzy of buying to start the year have gone to sleep and are lagging badly. Sectors like biotechnology and SPACs have been struggling to find technical support.
The social media traders that were dominating the action for a while have lost their energy, but since big caps have regained leadership, it has not been apparent in the indices. The question now is how earnings season is going to impact this rotational action. Will the gap between big and small caps continue to widen, or will it shrink? If it shrinks, how will that occur? Will small-caps play catch up to the upside, or will big caps show some relative weakness?
The reaction to earnings from the big banks this week should give us some insight into market sentiment. The SPDR Select Sector Financial ETF (XLF) is lurking at all-time highs and is trading mainly in tandem with the major indices. Higher interest rates are not a negative for this sector, especially if the yield curve steepens.
If banks do see some 'sell the news' reactions to earnings, will that cause a broad market reaction, or will it cause rotational action to occur? With the economy on the brink of a significant spurt in growth, the likelihood is for rotation rather than broad, correlated corrective action.
This market has been much tougher on stock pickers recently, but we need to keep slogging along and see what works. If we can stay a step ahead of the rotational action, we will be in good shape.
We have a slightly negative start to the week.