Earnings Concerning For Bulls
In the markets, everything matters. Common sense tells us that stocks in the
long run are tied to corporate earnings. Therefore, it is not particularly
surprising that stocks have been going nowhere fast in recent months given
the recent negative slant on earnings expectations. From CNBC:
Analysts are widely expecting S&P 500 companies to post their first
year-over-year decline since the third quarter of 2012. U.S. markets struggled
in the first quarter as investors worry over the impact of falling oil
prices on overall earnings and the effect of a strong dollar on multinational
companies, whose products are more expensive in foreign markets when the
greenback firms up.
Bullish Door Not Closed Yet
With respect to earnings, the easy thing for investors to do is to extrapolate
the recent bearish trend several months down the road. While earnings reports
may meet bearish expectations, it is also possible that future guidance comes
in above low expectations. Is there any support for the "things could turn
out better than expected" scenario? Yes, one example comes from the easy to
understand triangle formation shown on the weekly chart of the NYSE Composite
Stock Index below.
Triangles Are A Reflection Of Conviction
Points A, B, C, and D in the chart below show a series of higher lows. The
higher lows tell us that buying conviction has exceeded selling conviction
at higher and higher levels in recent months. Another way to visualize the
formation of the triangle is that dip buyers have been less and less patient
since the October 2014 low. The higher lows are the good news for the bulls.
The bad news is that based on numerous concerns, including earnings and the
Fed, buying conviction has not been strong enough to exceed the "cap" (see
orange line below).
What Does History Tell Us?
The formal name of the pattern above is an "ascending triangle". According
to Investopedia:
An ascending triangle is generally considered to be a continuation pattern,
meaning that it is usually found amid a period of consolidation within
an uptrend. Once the breakout occurs, buyers will aggressively send the
price of the asset higher, usually on high volume. The most common price
target is generally set to be equal to the entry price plus the vertical
height of the triangle.
All patterns speak to probabilities, rather than certainties. Is it possible
the bears seize the day in the coming weeks and stocks experience a correction?
Sure, it is possible. Even if the bearish scenario plays out, the charts above
can still assist us by giving us a reference point to spot a lower low.
A Bullish Bias, But Momentum A Big Concern
A reader of our recent posts may have a fair argument along the lines of "you
clearly have a bullish bias". The bias is the market's and has nothing to do
with our personal opinions at CCM. The following statement is factual..."the
stock market has a bullish bias". How do we know that? The hard data/facts
still side with the bulls. The series of higher lows since the October 2014
low is observable...and it also leans bullish until the chart morphs into a
series of lower lows and lower highs. While the weight of the evidence still
sides with the bulls, a portion of the evidence is screaming "slowing momentum...be
open to lower lows and a correction". This video
clip puts some additional context around some observable changes that would
increase our concerns about the stock market.
