I would describe this past week in the markets as interesting, or, at least, understandable. The DIJA ended the week at 10,997, just three points shy of the big 11,000 mark. All week long, the market struggled to get to the “magic” marker, but could not hold it. Resistance is the power.
So what is behind this resistance? Greece, employment data, and a general uncertainty about the strength of the global (U.S. in particular) economic recovery are the basis of it, for the most part. Add in deficit issues, inflation concerns, and housing concerns and one can understand why uncertainty still reigns. The sluggishness, however, might soon come to an end
I would suggest that the uncertainty is about to come to a temporary end for three reasons. The first is the concerns about the recovery are about to change …
April 11 (Bloomberg) — Sales and confidence probably climbed, manufacturing accelerated and home construction rebounded, making a lasting U.S. expansion more likely, economists said before reports this week.
Retail purchases increased 1.2 percent in March, the biggest gain in four months, according to the median estimate of 65 economists surveyed by Bloomberg News before Commerce Department figures on April 14. Merchants from target Corp to Saks Inc. benefitted last month from an early Easter, better weather and a pickup in hiring.
“What we’ve seen in recent months is a broadening of the recovery that, in our view, already makes it self-sustaining,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “One of the main reasons consumer spending improved pretty dramatically in the first quarter is simply that income growth is improving.”
The second is that we are now entering the Q2 earnings phase …
Corporate America should begin to see its first quarter of double-digit revenue growth in nearly two years, as earnings season gets underway in the week ahead. Last quarter we saw a lot of beats. I think we’ll be in the same ball park. We’re looking at growing evidence the economy is on better footing,” said Ed Keon, portfolio manager at Quantitative Management Associates. Last quarter, 72 percent of the companies in the S&P 500 beat analysts’ earnings estimates, according to Thomson Reuters.
It’s hard for analysts to build the macro picture into their earnings numbers. At the beginning of a recovery, they tend to be too conservative. At the beginning of a recession, they tend to be too optimistic,” Keon said. He said the consensus view is for earnings growth of around 30 percent. “My guess is it’ll be something better than that.
Citigroup chief U.S. equities strategist Tobias Levkovich also expects some knock out earnings reports. “I think earnings are going to look very strong…It’s going to be a combination of cost cutting and top line revenue growth,” he said. “The operating leverage in businesses is usually quite dramatic at turning points.”
And the third is technical …
The Market is facing midterm resistance, and this could be the last straw before a meaningful market surge. The next leg of market direction should be based on the Market’s ability or inability to hold midterm resistance. Either a test of midterm support will occur, or the Market will break out, and surge towards longer-term resistance instead. Either way, it all rests on the ability or inability of the Market to hold initial resistance.
Although the data on Friday is not quite enough to make a definitive technical call for an upward surge, I suspect given the first two reasons above, that surge will come. I suspect it will be not be dramatic, but it will bring more volume, and it will set up new highs and lows above 11, 000 in the DIJA. The bull rally will continue with just a it more strength.
