Earnings Season Kick-off!

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The market has been stalled since the beginning of the year. There was hope that the Labor Report would drive some clarity into the market (good or bad), but that didn’t happen. Instead, we received a rather convoluted report, with an amazing drop in unemployment and horrible job creation. I showed how it didn’t make much sense and hopefully explained some of the factors that contributed to the report. Regardless, it didn’t bring forth any confidence or clarity and the market flopped around with no real direction. Earnings season has kicked off and we have the Fed meeting at the end of the month, perhaps either or both of these will offer some sort of certainty (good or bad) so investors can make some investment decisions.

Earnings Season kick-off!

Earnings season kicked off with Alcoa on Friday, which came under pressure as the company announced a $2.3 billion loss in the most recent quarter on lower aluminum prices. As previously stated in my 2014 predictions, I think commodities have come under extreme pressure, as well as bonds, as we saw order flow head into equities, based on the Fed’s monetary policy and zero interest rates. I believe that has created some opportunities in the commodity market for 2014. Does that mean that Aluminum is a good buy at this level? There are two things to consider, one is currency values (inflation), the other is demand. The emerging markets are growing and that means global demand will continue to grow; however, that is being offset by stagnation. Inflation has been kept in check as the bond market had been propped up by the Fed and we have been the strongest of the weak Western currencies (Dollar, Yen, Pound, and Euro). I believe part of the value play in commodities is the artificially high buying power in the dollar (low inflation) and I believe that will change by mid-year as inflation becomes more apparent.

Some big names this week could impact the market, sector, and give a glimpse of forward expectations. It’s a heavy week on Wall Street.

Wall Street

JPM – JP Morgan Chase
WFC – Wells Fargo

BAC – Bank of America
CSX – CSX Corp.
WEN – Wendy’s

AXP – American Express
BLK – Blackrock
C – Citigroup
GS – Goldman Sachs
INTC – Intel

GE – General Electric
MS – Morgan Stanley
SLB – Schlumberger

There are some others, but these particular ones could send a jolt into the market. Notice this is a big banking and financial sector week, with all the majors reporting. As I’ve previously stated, I am not bullish the banking sector for three main reasons: the Volcker Rule has eliminated a huge revenue source for these institutions, the JP Morgan fine and open investigations against the bank means that the DOJ is on the war path and we should see some more big fines, and lastly – we still have a weak consumer, if we measure them by credit access and debt (leverage is still high). I believe that 2014 will be the end of the big financial run in the market and we could see a stall or decline. Remember, they are reporting for the 4th quarter, but I am more interested in their forward guidance.

We also have Wendy’s, while not as big as some of the other franchise operations, it should give us a good tell about the fast food market. CSX will give us shipping info, Intel will give us a glimpse of the microchip market, GE the global industrials, and Schlumberger the oil/gas technology market.

It will most likely be these names that capture the major headlines and set the tone for the banking sector, which could trickle over to a general market trend. I would be interested in GE and Intel to see how the world market (emerging market) is doing. Also, SLB’s look at the domestic and international growth in the oil/gas markets.

Support & Resistance

INDU 16,500
I still think we are in the straddle strike range and while the Labor Report didn’t drive any trends, perhaps it will be banking earnings this week that drives the market.

NDX 3500
This, too, is a straddle strike. Other than Intel there doesn’t seem to be any big earnings. LLTC and XLNX could be some volatile players, but I don’t see any big jolts to the index from earnings this week.

SPX 1850
Another market waiting to move. Could the banking sector drive enough volatility into the market? The VIX is in the low 12 range,  but hasn’t broken into the 11′s yet – so no red alerts.

RUT 1150
This index, like others, is really waiting for some resolution to drive more money into equities or for us to see a rush out of the equity markets. While I am bullish for the beginning of the year and then looking for a correction after the first quarter, the stall in here and the crazy Labor Report has me a little concerned; however, I think that Yellen will ride to the rescue and NOT taper or, for that matter, increase money printing, which could give the market a good jolt again.

The bond market has rallied and the 10-year yield has come down from 3% to 2.85% after the Labor Report. Could the Bond market be reading into the Labor Report and predicting the Fed will NOT taper? I think so. If they don’t or if they raise their QE monetary printing and spending that could send the equity and bond markets higher.

If Yellen DOES taper that could be the death knell of the equity markets and we could see a sell-off earlier than I initially predicted, but I am giving this a low probability.

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