The stock market faced several tests last week and passed on all accounts but that did not seem likely on Wednesday as the key averages had a roller coaster ride. The S&P 500 in initial reaction to the better-than-expected CPI report rallied to 4135 but then dropped to 4095 before lunch. The ensuing rally took the S&P back above 4125 before the market reversed on the FOMC minutes as it dropped back below 4090.
The weak close allowed for further selling on Thursday but that was not the case as once again the Wednesday afternoon decline was followed by Thursday buying as the S&P 500 was up 1.33% with a high of 4163. The action Friday was also choppy as the Retail Sales came in worse than expected but the Consumer Sentiment was better.
The earnings from JPMorganChase & Co (JPM) were supportive for the stock market and Citigroup ( C) AND Wells Fargo (WFC) also posted strong profits. JPM reported adjusted earnings of $4.32 per share versus an estimated $3.41 and they also beat on revenue. That was the best day for JPM since 2020 as it was up 8.8% for the week and closed above the yearly pivot at $131.65.
The weekly relative performance (RS) has moved above its WMA but needs to overcome the resistance at line b, to confirm it is a market leader. The volume increased last week but was still well below the high levels in March (see arrow). The rising OBV is still below its WMA and the resistance at line c.
One of the arguments of bearish strategists is that the earning estimates are too high and do not reflect the economic reality. As this headline from Bloomberg indicates “Five Things to Watch in What Will Be an Ugly Earnings Season” many on Wall Street have already concluded that earnings must come in weaker than expected.
Earnings experts FactSet pointed out that “In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.”
As of their April 14th report, they are looking for a 6.5% “blended earnings decline for the S&P 500”. This would be the largest earning decline reported by the index since Q2 2020. However, they also point out that “Over the past five years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 8.4% on average”. If this is the case this year, then actual earnings for the quarter could be positive.
This week we have Tesla (TSLA), Netflix (NFLX), Bank of America (BAC), and Goldman Sachs (GS) which also has a downbeat outlook for earnings.
The gains last week were led by the 2% rise in the Dow Jones Transportation Average and the 1.5% gain in the small-cap Russell 2000 IWM. The Dow Jones Industrial Average had a 1.2% gain with the S&P 500 only up 0.8%. The Nasdaq 100 was just barely higher.
The Dow Junes Utility Average was down 1.5% and the SPDR Gold Trust was down 0.1% after making a new high during the week.
Consistent with the recent Zweig Breadth Thrust buy signal the NYSE All Advance/Decline numbers were stronger than the market averages last week as 2032 issues were advancing and only 1124 declining last week.
The weekly chart of the Spyder Trust (SPY) shows that the resistance from the August and February highs is being tested. A strong close above this resistance should signal a move to the $425-$430 which is likely to trigger more short covering and likely a reduction in the bearish sentiment. Any pullback should hole the slightly rising 20-week EMA at $399.60.
The weekly S&P 500 Advance/Decline line is the closest to an upside breakout with resistance at line a. The NYSE Stocks only A/D line has turned up from its EMA and needs further strength to challenge the resistance at line b. The NYSE All A/D line shows a stronger short-term uptrend, line e, and could reach the resistance at line c, after a strong week of buying.
Since mid-March, there have been early signs that the yield on the 10-Year T-Note may be moving higher. The lower boundary of the trading range, line b, was tested with the April 6th low of 3.253%. Yields gapped higher last Monday and a close above 3.650% should signal a move to the resistance (dashed line) in the 3.739% area. There is still major resistance just above 4%, line a.
The MACD-His formed a positive divergence, line d, as yields made the correction low and turned positive last week. A strong move above the downtrend, line c, in the MACDs would be a sign of a stronger rally. The MCDs did not form a divergence at the recent lows like they did in early February.
So how will stocks react? Firming yields may help take some of the pressure off the bond market as yields dropped in March in reaction to the banking crisis. Until we see an upside breakout in the weekly A/D lines one cannot rule out bouts of heavy selling so manage your risk.
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