Professor’s Comments April 14, 2016

Posted by OMS  at April 14th, 2016

The Dow rose 187 points, closing at 17,908.  Volume was heavy, coming in at 112 percent of its 10-day average.  There were 109 new highs and only 4 new lows.

Stocks broke out of the sideways consolidation triangle that has been developing on the Dow for the past 10 days.  The breakout turned my Money Flow indicator on the technology laden NASDAQ positive, but not on the Dow.  So overall, the signals on the cockpit remain mixed with a Bullish bias.  

On Monday, shares of Alcoa (AA), whose earnings report is often regarded as the start of earnings season, dipped almost 5 percent in after-hours trading.  Analysts expected Alcoa to post earnings of 2 cents per share on $5.14 billion in revenue.  Actual results were 7 cents a share on $4.95 billion in revenue.  So while the company beat earnings estimates by 5 cents, the stock price dropped almost 5 percent in the wake of the report.  In my classes, when I talk about Alcoa and the start of earnings season, I tell students that the thing to watch is not the actual earnings number, but how the stock price reacts to the announcement.  In the case of Alcoa, the reaction was negative.  This is usually a pretty good tell for what other companies might report in the weeks ahead.

I mention this today because in the next week or so, many other big name companies, including the banks, will be reporting earnings.  So as we go into the end of the month, trading could become very volatile with large swings like the one we saw yesterday. 

Yesterday’s rally was ignited by J.P. Morgan’s surprise announcement of $1.35 per share vs. $1.26.  This number was actually pretty conservative given the number of downward revisions that were made over the last few months.  But nevertheless, the stock price rallied.  The market seemed to ignore the fact that the reported earnings were actually 7 percent lower than the year-ago period.  But questions still remain on other major banks like Bank of America Corporation (BAC), Wells Fargo & Company (WFC), Citigroup Inc. (C) and PNC Financial Services Group, Inc. (PNC), all of which will post results this later week. 

The two banks that I’m watching are BAC and WFC.  The slowdown in the Chinese economy and decreasing oil prices could have a significant impact on the revenue of these banks, as many loans made to small oil companies are starting to sour.  If these banks disappoint, yesterday’s rally could be reversed in a hurry.

Watching.

That’s what I’m doing,

h

BTW I will be traveling early Friday morning, so my next posting will be the Weekend Strategy Review.

Market Signals for

04-14-2016

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