Second Quarter Earnings Season Commences Next Week

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By: Kent Engelke | Capitol Securities

Second quarter earnings season commences next week. What makes this reporting season different is that estimates have not been reduced and as noted two weeks ago, value oriented issues are expected to post greater percentage profit gains than growth issues.

Is this a reason for the recent weakness in the NASDAQ, the index that is dominated by the mega-capitalized technology growth issues, five of which were posting 2017 gains of over 30%? Many have commented about the perceived market imbalances, the result of the massive proliferation of ETFs where the number of indices now outnumbers listed equities and technology based trading where the only variable is momentum and size.

If algorithmic trading is as pronounced and as dominant as I and many believe, monies could potentially gravitate violently from the over owned sector/sectors into the unowned sectors producing an outsize loss or gain respectively.

In other words, market activity over the last three weeks could become more pronounced where the averages may post a 7% to 10% decline while an under -owned sector produces a 10% to 15% advance.

Several weeks ago, Bloomberg wrote that technologies — led by five companies — has four times as much effect on the S & P 500 than oil. Technology represents a record 27% of the S & P 500. Energy on the other hand has fallen to the lowest level since 2004.

And then there is the Treasury market. The yield of the benchmark 10-year Treasury has increased by 23 basis points or almost by 10% in one week. Economic expectations have not changed. What is this suggesting? Two weeks ago many were suggesting a sub “two handle.” According to the SEC, 98% of Treasury trading is done electronically, dominated by HFTs and “algos.”

Change is the only certainty with only the velocity of change that changes.

Speaking of change, the NASDAQ advanced about 0.75% while all other markets were flat. The Minutes from the recent FOMC meeting were largely a nonevent.

Tomorrow, June’s employment data is released. How will perceptions be altered? And then there is the Trump/Putin/Jinping meeting.

Last night, the foreign markets were down. London was down 0.63%, Paris was down 1.10% and Frankfurt was down 0.78%. China was up 0.17%, Japan was down 0.44% and Hang Sang was down 0.22%.

The Dow should open moderately lower ahead of the 8:15 ADP Employment data. The 10-year is down 11/32 to yield 2.37%.

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