Stocks ripped higher this morning as earnings season continued. Sentiment flipped in a big way following several weeks of losses, marked by rising yields and Fed tightening fears.
Stocks were arguably due for a bounce. The question is whether a rally from here will be sustainable.
“Both sentiment and positioning are now too bearish, in our view. While we slightly reduced our record equity allocation […] we remain constructive on equities and think that a near-term rally is likely, particularly in small-cap and high-beta market segments,” wrote JPMorgan’s resident perma-bull, Marko Kolanovic, in a note to clients.
Some analysts blamed today’s equity surge on corporate earnings. But thus far, results have been mixed. Bank stocks climbed higher on rising yields – not earnings, specifically – while Johnson & Johnson (NYSE: JNJ) saw its shares rise despite reporting mixed quarterly results before the market opened.
LPL Financial strategists Jeff Buchbinder and Ryan Detrick told investors that most companies should still surpass their earnings estimates, though, even in the face of significant economic uncertainty.
“Pressure on profit margins from higher costs for virtually everything, notably labor, materials, and transportation, made this quarter difficult to navigate,” they said in a morning commentary.
“Add spillover from the Russia-Ukraine conflict and intermittent COVID-19 lockdowns in China, and companies’ bottom lines are getting hit from several directions.”
The analysts continued:
“Despite the tough environment, we believe the odds favor companies beating estimates as they have done historically on the back of double-digit revenue growth. High inflation translates into more revenue so earnings can grow at a solid pace even with some narrowing of profit margins.”
That “narrowing” is expected to continue, however, and it may dent share prices in the coming months if slimmed margins appear in future earnings.
For now, though, the stage is set for a short-term rally.
The S&P 500 (as represented by the SPY) is in the process of setting a higher low. If the index closes trading today above the 10-day moving average – a key short-term trend identifying indicator – we’ll have evidence that the market’s short-term trend is beginning to reverse. We saw that back in mid-March when the SPY closed above the 10-day moving average before soaring through the end of the month.
Stocks sold off in April, but seem to be turning a corner as of this morning. The SPY is also trading above its minor bearish trend (yellow trendline), which traces the standout highs of the recent trend.
If the SPY manages to close out the day where it’s currently trading (or higher), short-term bears may want to consider switching sides. A move above today’s high tomorrow would likely confirm the next rally.
And, given how quickly the market moves these days, it could be a big one. Just look at how fast the SPY zipped higher back in late March.
That’s why, despite the market’s recent difficulties, happy days may be here again for bullish traders. But that’s only if they can pick their spots correctly – something our premium members learned first-hand over the last few weeks as sentiment flipped several times.
