After markets slumped Friday, some major upcoming earnings reports could either “shift the sentiment higher or add fuel to the fire on the downside,” according to an analysis from Randy Frederick, managing director of active trading and derivatives at Charles Schwab.
Of particular note are the forthcoming reports from companies including Apple Inc., AT&T Inc., The Procter & Gamble Co., Merck & Co. and Comcast Corp. Thus far, Frederick says, Q3 earnings have been somewhat underwhelming, with many S&P 500 stocks falling short of their projected revenues. Even more troubling are predictions that next quarter’s earnings will also be disappointing. “This dour outlook will ultimately translate either into lots of upside surprises, or a very weak Q4 earnings season,” Frederick says. “At this point it’s too early to forecast which.”
Although Q4 earnings are a potential concern, Frederick points to two bits of good news for markets: the recently released housing numbers, which showed an increase in September housing starts, and modest volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX).
Even though last Friday’s -1.66% SPX pullback was the largest since June 21, 2012, the VIX jumped only 2.02 (see chart below), a much smaller reaction than that in June. Frederick attributes this to the continuing effects of the “Draghi/Bernanke put,” and notes that “VIX futures still indicate very little chance of a VIX greater than 20 for the remainder of the year.”
Battle for momentum
A key indicator to watch for in the SPX is the 50-day simple moving average. “While a close below [1434 in the SPX] wouldn’t be catastrophic, it would indicate a clear deterioration from the upward trending channel that has been in place since the middle of May (see charts below),” Frederick predicts.
This first chart shows early weakness in the cash SPX index placed well below the key indicator but a furious late day rally accompanied by strong volume allowed the index to settle virtually at the key 50-day simple moving average (second chart).
Next page: See today's cash close
In the shorter term, Frederick sees a brief period of weakness, followed by a new uptrend potentially motivated by this week’s earnings reports. In the long term, he continues to predict that the SPX will reach 1500 by the end of 2012.