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Corporate Profits Underpin Stock Gains

Sunday, 06 Feb 2011 01:08 PM

 

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With earnings continuing to surprise on the upside and minimal technical resistance ahead, the bears may have to wait a bit longer for the much-anticipated end to the current stock rally.

The VIX, a gauge of investor anxiety, dropped last week despite unrest in the Middle East and oil prices are basically unchanged from two weeks ago. After posting its best week in the past nine last week, the S&P 500 has actually seen oversold levels tick lower.

"I expect the market to continue to rally despite the fact the economic news is sluggish in the jobs front," said Michael Yoshikami, chief investment strategist at YCMNet Advisors in Walnut Creek, California.

Government data showed Friday the U.S. economy created 36,000 jobs in January, far fewer than expected, but the unemployment rate fell to its lowest since April 2009. Economists agreed a recovery in the labor market was proceeding but not gaining speed.

Upbeat signals in the economy, coupled with a positive bias in the current earnings season, should continue to propel equities higher.

More than 70 percent of the S&P 500 companies have reported earnings above estimates so far, according to Thomson Reuters data. Investors expect aggregate earnings rose 37 percent in the last quarter, the highest estimate for that period in more than 10 months.

"We believe corporate earnings will continue to recover as companies are more efficient and economies bounce back," Yoshikami said.

FEW HURDLES AHEAD

The energy, industrials and technology sectors are "trading well into overbought territory," according to a report from Bespoke Investment Group. But two recent weeks of declines are helping ease overall selling pressure, and the rally that started in September shows no signs of weakness.

"This market has been really eating up resistance levels as an every week event," said John Kosar, director of research at Asbury Research in Chicago. "We targeted 1,313 for (last) week as a near-term inflection point, and we haven't broken it yet."

The target coincides with the benchmark's highest level in August 2008. Chartists have mentioned the 1,360 area, the 76.4 retracement of the S&P's downhill move from late 2007 to March 2009, as one of the few technical hurdles the index faces before hitting 1,400.

The S&P has risen 25 percent since the start of September, which has led to a lack of confidence and calls for a pullback. Still, the CBOE volatility index fell 20.5 percent this week after a near 30 percent spike in the two previous weeks.

"There's a healthy degree of skepticism and many people are still calling for a correction," said Richard Ross, a global technical strategist at Auerbach Grayson in New York.

THIN DATA CALENDAR

This week is slow in terms of economic indicators, with the preliminary reading of the Reuters/University of Michigan consumer sentiment as the highlight of the week.

The reading is expected to tick up to 75 from last month's 74.2, according to a Reuters poll.

"There's enough of bits and pieces of data that if they are in the aggregate positive, they can create an (upturn) in the market," said Wasif Latif, vice president of equity investments at USAA Investment Management in San Antonio, Texas.

Some investors mentioned a spike in oil prices as one of the possible headwinds for the economic recovery, and the unrest in the Middle East as an important variable for equities.

As hundreds of thousands of Egyptians marched in Cairo on Friday to demand an immediate end to President Hosni Mubarak's rule, Brent oil settled below $100 a barrel for the first time in a week. U.S. crude for March delivery fell $1.51 to settle at $89.03 a barrel.

"If oil prices continue to rise and Middle East chaos spreads, you will potentially see a headwind develop for the global economy and that will affect the stock market," YCMNet's Yoshikami said. "Oil at $110 barrel becomes a significant headwind for the economy."

FED REASSURES INVESTORS

Federal Reserve Chairman Ben Bernanke offered a moderately more optimistic assessment of the economy's prospects than in previous remarks, although he made clear the recovery still needs support from the Fed.

"As long as the Fed is indicating they will remain supportive and accommodating, that will continue to provide some degree of support to the market," said USAA's Latif. "Investors will see weakness in the market as a reason to buy."

© 2014 Thomson/Reuters. All rights reserved.

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