Watching the SPX & Earnings

Even though its Tunes Tuesday, we have to slip some market talk into the dialogue.

Jeff Cooper has an interesting column on the S&P that’s a worthwhile read. We disagree slightly on the price level — he uses 1163 as a key, I’m watching 1165-67.

But note the S&P500 is closer to re-entering its previous trading range than either the Dow, Russell 2000 or the Nasdaq (See these charts).  Why? Out of all the major indices, the S&P500 has the largest concentration of energy stocks  — which have been absolutely hitting the cover off of the ball.

Indeed, energy accounts for less than 9% of the SPX — but is responsible for an outsized percentage of year-over-year S&P500 earnings growth. By some estimates, it will be half of the 12% earnings gians in the index. Back out energy, and a 6% year-over-year gain is nothing to write home about. Indeed, its consistent with our prior discussions of waning earnings momentum. Making matter sworse, energy earnings have a disconcerting tendency to suck all of the oxygen out of the room for everyone else.

Regardless, the present oversold condition can potentially support a rally up to the resistance at the bottom of the prior trading ranges. At those levels, there is a high probability the rally fails, as that resistance may be very difficult to overcome. A failure at those levels is what sets up the move to new 2005 year lows in the June July time frame (as previously mentioned here).

A high volume thrust into those prior trading ranges would be extremely Bullish. That’s what resets my forward look, and would force me to get long again. (I’m not short, just sitting in cash).

All that said, there are lots of economic reports coming up later this week – Durable Goods, GDP, Personal Income. Expect more volatility later this week.

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  1. The Nattering Naybob commented on Apr 27


    Oil has been whipsawing daily. Me thinks a pullback in the stocks and the commodity is coming.

  2. alex norman commented on Apr 28


    I have enjoyed reading your commentary on the markets and on trading — including the “apprentice investor” series. I eagerly anticipate your writing on the differences between trading and investing.

    I am in 100% cash right now and am looking for short opportunities.

    I am curious as to what combination of fundamental information and market action you look for to take a short position. Even if you aren’t short now, it would be a great post for you to take us through the analytical process — what ideas provide the right catalyst to put on a trade, how to find the best risk/reward situation, entry points, etc.

    I know this is a pretty open-ended question, but hey, that’s what blogs are for, right?

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