Averages Tread Water Amid Earnings Deluge

1/27/2014


With earnings-reporting season in full swing, the market's near-term action deserves close attention. A move in the Dow Industrials above their Dec. 31 closing high of 16,576.66 would be bullish, as it would confirm the Dow Transports' recent move to new highs. For now, with the Dow Theory in the bullish camp and quality stocks still available at reasonable valuations, our buy lists have 92% to 96% in stocks.

Improved growth expected

So far, earnings season has been mixed, with a lower-than-usual percentage of the early reporters beating consensus profit expectations. But the percentage of positive revenue surprises compares favorably to historical norms, and profit expectations for full-year 2014 have held up relatively well.

Fourth-quarter results hold extra importance because they often come with guidance for the year ahead. With stocks moving sideways after a huge run, economic reports pointing to improved growth, and recent guidance from companies overwhelmingly negative, this December-quarter reporting period could be especially crucial.

Expectations for the March quarter are modest, with consensus estimates projecting just 4% year-to-year profit growth for the S&P 500 Index. But growth is expected to accelerate every quarter this year, leading to full-year growth of 10% to 11% for the index. While such forecasts are widely believed to be optimistic, investors clearly anticipate some pickup from the 4% to 5% gain expected for 2013.

As always, the market's reaction to quarterly results will be the best gauge of whether results and guidance are meeting expectations. A move to new highs in the Industrials would be encouraging, especially if accompanied by a true breakout in the Transports and the broad market.

Conclusion

Without concrete signs of improved profit growth this year, stocks may have trouble making much headway. Subscribers should keep a close eye on the market's reaction to December-quarter results.

Don't be afraid to buy reasonably valued stocks that rally on strong results, and be quick to sell if a company's results suggest it no longer qualifies as one your top picks.


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