Just when you thought it couldn’t be more confusing, we have a big earnings season coming up. My favorite time of the quarter! Not that it’s more important than any other time but there are so many questions out there to be answered. First and foremost, has the market moved too far, too fast? Are good earnings already baked into this market, which has risen to levels not seen since the disaster of fall 2008? If so, will we see some type of severe correction? I can tell you one thing that if a company does not beat expectations or gives shoddy guidance then they are likely to be punished severely. But isn’t that the norm? That being said, I believe the market has NOT discounted good earnings for this quarter and will be forced to reset price levels and targets. Why make this assumption? The proof is in the economic numbers and jobs creation, and we’ll see this at the end of April with the first release of GDP for Q1.
The first week starts off rather light but with quite a few notable names. This also being an expiration week and with low volatility to boot unless there is a total blowout of a number I don’t expect to see dramatic movement. However, since we follow trends then stocks that boast good earnings may continue to trend higher. Some of the groups that I favor include financials, brokers, tech, coal, oil and metals. These are the outperformers and should dictate where the markets should go over the coming months. These are good indicators of health and strength in the markets.
Where Did All That Fear Go?
VIX Daily Chart
The VIX is shattered here, having closed now at 16%. A year ago you would have never dreamed of seeing volatility so low. But, with zero interest rates, rising trend in bond yields and cash paying nothing in money markets, money has to find a place to work. Stocks are relatively cheap on an historical valuation basis (selling at 14x forward earnings where markets normally trade 16x). Still, there are nonbelievers out there. This is good, as the ‘wall of worry’ is up high and is quite strong. Think about it: If everyone were bullish (and believe me, that’s not the case) then in theory everyone is ‘all in’ and we would eventually see liquidity dry up. Realistically that would never happen. But according to the VIX there is high complacency while fear is not a factor. Can this continue? It certainly did for a long stretch in the 90′s and 2004-2007. Even the shocks of Greece and other country woes cannot stop the bullish fever as indices stretch toward milestones.
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