In the ongoing bad-news-is-good-news saga, last week’s surprisingly weak jobs report led to speculation that the Fed would delay hiking interest rates, which is perceived as a positive for equity investors. So, bulls are getting a boost for the moment, although those previously hard-won round-number price levels for the major indexes are now serving as ominous overhead resistance that will likely require a strong new catalyst to break through. Whether stocks are destined for downside or upside from here, Q1 earnings season starts this week and will likely provide the catalyst.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
Market overview:
The major market indexes continue to toil below recent support-turned-resistance thresholds, including S&P 500 2,100, Dow Jones Industrials 18,000, and NASDAQ 5,000. The holiday-shortened week started out with a bang on Monday, but then drifted lower in anticipation of the jobs report on Friday and this week’s start to earnings season and the Q1 reports. As it turned out, Labor Department data for March showed that U.S. employers added the fewest jobs in over a year, with only 126,000 jobs versus expectations of 245,000, but the unemployment rate remained unchanged at 5.5%.
Heading into Q1 earnings season, the bar has been lowered considerably. According to S&P Capital IQ, S&P 500 companies are expected to post earnings growth of -3.0% Q1 2015, which would be the first decline since Q3 2009. Revenues are expected to fall -1.3% in Q1 2015 due to the strong dollar and weak commodity prices. Among the 101 S&P 500 companies that pre-announced their earnings guidance, 85 offered negative outlooks while only 16 were positive. Moreover, only five of the ten U.S. business sectors are expected to report positive Q1 2015 earnings growth, with Financial, Healthcare, and Consumer Services (Discretionary/Cyclical) the leaders and Energy, Basic Materials, and Utilities the laggards.
As a result, the boo-birds are telling us that the expected economic weakness is the start of a bigger slide (or even a reversal) in the economic recovery. But in our current slow-but-steady recovery, which is good in that growth is not overheated and investor sentiment is not overly exuberant, there is always going to be some volatility in each quarter’s results rather than posting a consistent level of growth. We got a big drop in oil prices, which was good for most consumers but bad for large swaths of the nation’s economy, particularly within Energy, Capital Goods, and Materials segments. We saw labor issues at West Coast ports that impacted many imports and exports. We had severe winter weather across much of the country that lasted longer and was even worse than the nasty stuff we endured last year. Now oil prices are creeping back up, port strikes have been settled, and spring weather has arrived.
