Equities At An Inflection Point, Risk Is To The Upside

Earnings Season Is At Hand

The Q2 earnings season is underway and the signs are good for two things. The first is that, for many businesses, the quarter was much better than expected. That’s not true for all businesses, some are falling by the wayside, but enough are surviving to keep the equities market happy. The second is that the analysts outlook for the full-year is too low. The analysts made their estimates based on fear and now that those fears haven’t played out its time to revise the estimates. If there is one thing I like to see to drive a bull market higher and higher it’s when the analysts are off on their projects and upward revisions become the game of the day.

Market action over the past few months has been bullish. More recently, the S&P 500 has been in consolidation and forming what looks like a nice bullish rising triangle. In the present, as in over the past two days, the index has been testing resistance at the top of the triangle and it looks like that resistance is breaking down. The indicators are bullish, both MACD and stochastic are forming bullish crossovers, so investors can expect to see this level tested at least if not outright broken. At that point, the next upside target becomes the all-time high set just before the COVID-pandemic tanked the market.

The risk for traders is in the earnings and the data. Although the stage is set for a robust melt-up to continue, the end will come sooner or later and that spells correction for the market. While the outlook for earnings is brightening, we’re still just talking about analysts consensus estimates, estimates that rely on economic reopening to bear fruit. With the number of COVID cases rising rapidly in the U.S. and globally chances of economic impact if not another shut-down grow daily. Bulls will want to take profits once prices surpass resistance and then again when the all-time high is reached. If the bull market is going to continue past that point it will flash another signal.

Next week will be a big test for the indices. The economic calendar is relatively light but the earnings calendar is robust. Next week isn’t the busiest week of the reporting season but it isn’t far off. Over 100 S&P 500 companies are slated to report and that is no joke. By the end of the week we’ll know if the market will continue higher orĀ  not.