Market Bounces off 200 Day Line!

Estimates for earnings and cash flows are going up at a pace that we haven’t seen since 2011. Estimates for the following quarters and full-year 2018 are also going up. The revisions trend is broad-based and not concentrated in one or a few sectors.

Total earnings for the 341 S&P 500 members that have reported results already are up +14.7% from the same period last year on +9.3% higher revenues.

78.6% beating EPS estimates and 76.8% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 63.6%. Not only is growth tracking above what we had seen from the same group of 341 index members, but a record proportion are beating EPS and revenue estimates.

Combining the actual results from the 341 index members with estimates from the still-to-come 159 companies, total earnings are expected to be up +14.1% from the same period last year on +8.2% higher revenues.

In a nutshell, we haven’t seen numbers this good in many, many years.

What’s driving the market?

The market is being driven partly by the uncertainty coming out of Washington and the sharp increase in interest rate yield and bonds dropping sharply. If economy expands quickly, it causes interest rates to increase; this increases pressure on the overall stock market, since higher interest rates are bad for most businesses.

Usually, economy accelerates at a slower rate and that causes the stock market to slowly compensate with the bond market. In the present scenario, bond yield rose too quickly, not giving stocks a chance to adapt…which made stocks vulnerable and accelerated the selling pressure over the past several days.

The stock market broke through the 50 day moving average quickly and bounced off the 200 day moving average very quickly on Friday.

The next step is to break the 50 day moving average back to the upside once again. The fact that stocks are exhibiting extreme volatility, the most we’ve seen in history, is very positive however. Increased volatility is the ultimate trend killer.

What does that mean?

It means that most directional price moves end when the volatility level increases substantially above the daily average trading range. Typically, increased volatility is caused by fear and panic…something that doesn’t drive the markets over the long term. Conversely, if the trading action was trading lower slowly and deliberately, I would be much more concerned with the longer term outlook.

Lastly, there’s no major turmoil in the world and historically, rates remain near historic lows. Keep in mind, the FED can regulate the interest rates, based on how the overall stock market is responding to stimuli and I don’t believe the current FED want a blood bath on their hands.

That tells me that in the worst case scenario, the rate at which FED intends to raise rates will slow down to give stocks a bit more time to accommodate the current rate hike due to strength in the economy.

Lastly, bouncing off the 200 day line is a step in the right direction.

Look for volatility and trading range to begin declining and focus on whether or not the SP 500 breaks the resistance level at the 50 day moving average…both signs that the selling pressure is coming to an end.

Roger Scott
Head Trader