Looking For Direction as Earnings Begin

Let the earnings begin. The attention of investors will shift from jobs to corporate earnings as they start to report today. The question swirling in my head is will they live up to expectations, and if they do, will it be enough to push the market higher following the recent selling on economic data? To answer those questions would be nothing more than speculation, and you know my thoughts on that front. The reality lies in the confidence factor relative to the outlook for growth. Currently the growth forecasts have not changed. The earning growth expectations for S&P 500 index is 8% for the quarter and well within reach for most companies. Last quarter 63% of the companies reported better than expected growth. Thus, the outlook is positive and I agree as my expectations are for positive earnings reports overall. The question mark comes with the guidance for next quarter and beyond. Will projected earnings for the year remain in place or adjusted? What about hiring or job creation to show further growth? Margins… impact from higher gasoline prices? There are plenty of questions concerning the future and most of the attention will given to that data more than last quarters earnings. The weaker economic data is prompting the investor to look forward and confirm the confidence in growth for the economy and in turn for stock prices.

The response to the 1% drop in the broad markets on Monday was muted. The consensus was one of just a normal pullback process and little concern relative to the move being the beginning of a correction. Only time will tell on the correction front, but the overall concern was more calm than fear. The indicators showed some anxiety with the VIX index jumping above resistance and closing near the 19 level. If the indicator remains at that level or moves higher it will bring more anxiety to play in the broad markets. For now I am in the camp of don’t over worry. As I posted yesterday the 1340 level on the S&P 500 index is the key level to watch in the current move from a short term (9-12 months) perspective. The worries in place are not going away anytime soon and the next two to three weeks will provide insight into earnings and investors sentiment which will set the course short term. Be patient, set your stops and keep looking forward.

What happens if we hit our stops as we did yesterday? The simple answer is to prepare for the worst and hope for the best. All too often as investors we believe that once we exit a position we can’t buy it back. We all know that is a mental game and nothing more. Thus, we have to know ourselves as an investor. If you can’t bring yourself to buy positions back then adjust how you set your stops to deal with your investor psychology. But, if you were stopped out of positions you still think are worthy of owning have a plan for putting them back into your portfolio. An example of this for me is hitting my stop on XLF, SPDR Select Financials ETF. As you can see on the chart below the position broke near term support and triggered the stop. The next level of support is $14.95. Watching for a test of support or a reversal back above the $15.50 level are the two options. Either way knowing the entry point is a matter of patience currently to see how it moves over the next couple of trading days. I will then set a defined entry point, time frame, target and stop to define how to manage the position. Re-entering a trade is no different than defining a new position for your portfolio. Managing your emotions is the challenge.

Goal for the day is to see how investors react to Monday’s activity. I would expect some buying at one point in the day. Do we hold the move or do sellers step back in and take control? Not expecting this to be a decision type day for the broad markets, but you have to watch the overall activity. Money flow into Treasury bonds was high on Monday. Yield on the thirty year fell to 3.18% and back below the 3.2% breakout level. The response to that move is a key indicator for me. The VIX index jumped near 19 and well above the 17 resistance level. Be patient and let this all play out in the coming days. Look for where there are opportunities on both the upside and downside as both are currently an option.