Scott Martindale | Oct 11, 2012 05:11AM ET
As earnings season gets underway, it has become clear that there is a disconnect between the bull market in stocks and the ability of the companies behind those stocks to generate any revenue growth in a weak global economy. Although U.S. companies have shown eleven consecutive quarters of year-over-year earnings growth, Wall Street analysts have continued to slash forward earnings estimates, and indeed it is reflected in Sabrient’s SectorCast model.
There is no denying that companies have been squeezing every ounce of earnings from stagnant revenues, and now they find themselves just about as lean and mean as they can get. Financials are seeing the most growth, as banks capitalize on yield spreads and cheap trading capital. Consumer Services companies also are projected to show favorable year-over-year growth as consumer confidence has improved and consumer credit grows. On the down side, Basic Materials and Energy sectors are projected to have the most earnings contraction.
On Wednesday, Industrial sector stalwarts Chevron (CVX), Alcoa (AA), and Cummins (CMI) all made disappointing statements about future earnings due to a global slowdown in demand. On the plus side, Consumer Services leaders Yum! Brands (YUM), Walmart (WMT), and Costco (COST) all came through with strong earnings reports.
Exactly five years ago Wednesday, in October 2007, the S&P 500 hit an all-time high of 1576. Of course, that was before the Great Recession and financial collapse of 2008. So far, the most obvious result from all the Federal stimulus over the past few years has been an inflated stock market. But that’s not going to be good enough forever.
The question is how much longer will U.S. and global institutional investors (with little else in the way of attractive investment options) continue to push U.S. stocks higher in anticipation of future growth? This would have to rely on the hope that stimulus will actually start to help businesses grow. To do so, the Fed can’t do it alone through monetary policy. Stimulus will have to come from the fiscal side, as well, with strong leadership from the President, and a Congress that puts jobs and small businesses ahead of political brinksmanship. If they can manage to do it, stocks have a great chance of challenging those previous highs from 2007.
As equity correlations have gone down, we should see the return of the art of stock-picking. Recent examples include our negatively-rated Titan Machinery (TITN), CLARCOR (CLC), and Questcor Pharmaceuticals (QCOR), each of which have fallen hard, and our positively-rated Coventry Health Care (CVH), KeyCorp (KEY), and Six Flags Entertainment (SIX). Notably, based on an anonymous survey of CFOs last year, an independent study revealed that 20% of companies are managing earnings and using aggressive accounting methods to legally improve their earnings reports.
The S&P 500 SPDR Trust (SPY) closed Wednesday at 143.28. It remains within the same bullish rising channel since the rally started at the beginning of June. Price seemed to have been forming a neutral symmetrical triangle while the Bollinger Bands rapidly converge, which was like a coiled spring getting ready to break in one direction or the other. It initially broke to the upside last Thursday, but then reversed this week going into earnings season, and Wednesday it broke down below the lower line of the triangle.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,” closed Wednesday at 16.29. This is still quite low and generally bullish for stocks.
Latest rankings: The table ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score, which employs a forward-looking, fundamentals-based, quantitative algorithm to create a bottom-up composite profile of the constituent stocks within the ETF. In addition, the table also shows Sabrient’s proprietary Bull Score and Bear Score for each ETF.
High Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods. Bull and Bear are backward-looking indicators of recent sentiment trend.
As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.
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