CORPORATE EARNINGS TO SET THE TONE
LAST week saw extraordinary gains on equity markets just when it looked like we were heading for another meltdown. In the preceding week, numerous technical support levels were breached as a number of major indices slumped below significant retracement levels. There was talk of “death crosses” appearing on various charts as 50-day moving averages slipped below their corresponding 200-days, suggesting further downside to come. But when US traders returned from their long holiday weekend they brought back a renewed appetite for stocks. Many stock indices had their best week in nearly a year, with the S&P finishing 5.4 per cent higher.
Looking at the charts, it appeared that equities had fallen too far, too fast. A corrective rally was due and the S&P bounced off an area of support created by Fibonacci retracements of the October 2007 to March 2009 and March 2009 to April 2010 rallies. Fundamentally, there had been so much negative news surrounding the markets that it took only the slightest let-up in gloom to lift spirits. BP reported that it was ahead of schedule to stem the flow of oil from its gushing well in the Gulf of Mexico; the European banking stress-tests were increasingly spun as a potential market positive; even the grim US economic data of the past few weeks suddenly had an upside, at least as far as equities were concerned; and given that unemployment and housing are still so awful, there is an increased possibility of a second round of quantitative easing being introduced.
This week sees the start of the second quarter earnings season, and aluminium maker Alcoa yesterday released its numbers. This will be an unusual first week as some big names are joining Alcoa and reporting early. These include Intel, AMD, Google, JP Morgan, General Electric, Bank of America and Citigroup. It is going to be a tricky one for investors as corporations have been reluctant to give much in the way of forward guidance. But investors will be mindful that year-on-year comparisons could flatter once again, so companies’ statements and future outlooks will be crucial in forming future investment decisions.