Week Ahead: Gold Higher As USD Slips; Google, Amazon Report

by Pinchas Cohenh2 The Week That Was/h2 h3 US Stock Market: The Bullish Case/h3

• Earnings Support Rallies

Underlying this policy and liquidity driven markets, Fundamentals are apparently driving this rally. All-time highs in earnings in line with S&P 500. First quarter earnings came in much stronger than expected. Heading into the second quarter, expectations weren’t as high. Forecasts had expected 8-percent growth—80-percent of the 20-percent that has been reported so far have beaten expectations— but earnings are tracking nearly 10-percent. However, that is partly due to the base effect of the energy sector recovering last year. On the other hand, if the energy sector is removed, Q2 results are mid-single digits and more modest than the first quarter.

However, that is partly due to the base effect of energy recovering from last year. When removing energy, however, Q2 results are softer, in the mid-single digits and more modest than the first quarter.

For the technology sector, even though a lot of the upside has been driven by mega caps, the sector as a whole is enjoying a wide breadth of strength. Even on an equal weighted basis—in which small companies are given equal weighting with large companies—it is growing more than 20-percent

• Largest US Outflows Since 2009
• Global Markets Have Lower Multiples

While the S&P 500 index closed at a second, consecutive weekly record, within a third consecutive gain, capital outflows have been increasing. The SPDR 500 Trust (NYSE:SPY), the biggest exchange traded fund tracking the US equity benchmark, shrank by $3.8 billion in July, on pace for its fourth consecutive monthly outflow, and the longest streak since the start of our current bull rally, which began in 2009.

SPY isn’t the only fund that's thinning. US mutual funds and ETFs in the week ending July 12, have lost $2.1 billion. Contrast that with $5.1 billion that went into global funds. The US market is at its most underweight since 2008.

As stated above, strong earnings growth kept price-to-earnings multiples below the March peak, even as prices soared. While this in itself may be considered bullish, as earnings support the prices, US multiples are much higher than European multiples. German and French shares trade at trailing P/E as low as 18.9; Japanese shares are as low as 19.2; and emerging-market equities tracked by MSCI Inc. trade at 16.1. Finally, the MSCI World Index ex-US trades at 19.7. Compare all of them with the S&P 500’s expensive 21.6 P/E.

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The leadership among this string of records is tech. Both the NASDAQ Composite and the NASDAQ Tech formed confirmed hanging men. A hanging man occurs when a stock or index dips but manages to close near its open, at the top of the range.That particular recovery is considered bullish, and resembles a hammer pattern, which follows a decline. However, a following session with a lower close seals the bearish sentiment, a correction after a rally.

The background psychology is that traders who were rewarded by going long find themselves in losing positions with the lower close. They exit their positions, pushing the price further down. When prices begin to slip after a meaningful rally—The NASDAQ Composite advanced 5 percent and the NASDAQ Tech 100 advanced 7.35 percent, since July 6—investors get nervous and begin unloading their shares.

This starts a snowball effect into a selloff. The hammer’s location on the NASDAQ 100 Technology is telling. It formed as the rally was nearing its June 9 all-time high.

The key takeaway from ECB President Draghi’s remarks last week: while the eurozone’s economy has vastly improved, the ECB is not yet ready to end QE.

Let’s take a step back for context. Three weeks ago, Draghi spoke of the eurozone’s economic strength, path to inflation and how, as the recovery progresses, extreme monetary stimulus may be unnecessary. This hawkish message caused a mini taper tantrum – a spike in bond yields and the euro. His goal this past week was therefore not to rattle the markets again and add some nuance to his previous statements.

With regards to growth, while he’s proud of the economic recovery, he acknowledges its due to, and therefore still dependent upon, easing monetary policy. Additionally, no matter how robust the growth may be, it has yet to lead inflation up – the buttress to a growing economy. Therefore, the ECB will keep its monetary policy loose for the time being, until the economy can show that it is able to ride without QE 'training-wheels' and is strong enough to go uphill on rising rates.

China’s real GDP growth recorded a 6.9 percent growth for the second quarter YoY. This read demonstrated both an economic durability, as well as beating expectations. Retail sale, industrial production and investments demonstrated the same – all steady and coming in above expectations. China has been demonstrating resilience, despite increasing regulations, which scared investment away. That's a very bullish statement for the world's second largest economy.

Plus, it isn’t good news just for China; it's the key driver for emerging markets growth. This economic strength, even while emerging markets’ valuations are at a 25-percent discount relative to US equities, with a 16.1 per MSCI compared to the 21.6 of the US.

Oil has been rallying on falling stockpiles but fell 2.5 percent, below $46, after a report of rising OPEC oil output. While the US oil rig count fell by 1 rig to 764, bullish for oil, OPEC’s July oil supply was set to rise by 145,000 barrels per day MoM, which is bearish.