Are Earnings Strong, Weak or Mixed this Quarter?
As the month of July comes to a close, financial markets have temporarily stabilized. Most market participants have come to accept that the Federal Reserve will be raising interest rates for at least the near-term future. Inflation continues to hold at a 40-year high. The Personal Consumption Expenditure Index, the key economic indicator the Fed uses to gauge inflation, sits at its highest level since 1982. Other key indicators the Fed follows, such as the Consumer Price Index (CPI), have already surpassed their 1982 highs earlier this year. The world economy has officially entered recession territory as it has contracted for 2 consecutive quarters. The IMF Bank has reduced its economic expectations for the next two years.
The highlighted sections above show the month of July which has been up for most of the month. The MACD on the bottom section of the chart is not back in positive territory and the RSI is starting to show an overbought reading just as the market rallied into resistance.
The U.S. dollar continues to be the strongest currency in the world. This is largely due to the fact that it is the best among the worst. The dollar has outperformed the euro as the European economy is far worse off than the U.S. economy. The dollar also benefits from a rising interest rate environment as it is the world’s reserve currency. Rising interest rates mean investors are looking to safely put their money in the USD. They then put those dollars into triple tax-exempt treasury bonds to earn 2.25 percent to offset some inflation.
Results this earnings season have not been terrible, but there have been a lot of downward revisions and overall remain rather mixed. We have seen many companies miss their earnings results yet their stocks have been down so much they still pop or rise on their earnings results.
$AMZN was a perfect example of this as they missed on their earnings number, yet beat expectations on their revenue, which is not surprising during inflationary times. Due to the fact that the stock is down so much on the year, it rose considerably on the earnings results as they weren’t as bad as expected. The chart above shows how much Amazon is for the year, but also shows how much Amazon gapped back up on a mixed earnings report.
What do we Expect for the Markets in the Near-Term?
August tends to be the most low volume month of the year as those who live in the northern hemisphere often go on vacation this month. The world’s capital markets are managed from New York and London (both in the northern hemisphere). The second week of August is the last opportunity for these money managers to enjoy the end of summer. As vacations wrap-up, financial markets generally go into a coma-like state. The first 2 weeks in September often show signs of life, but are generally in a holding pattern until the third week of September. At this time financial markets come back to reality. Unfortunately, this year’s reality might not be so good.
From an investing perspective, caution is the best course of action as market uncertainty and political change are in view. Although, for the short term, the market should hold in and around these levels from a technical perspective and we can expect a holding pattern until mid-September. Traders don’t have to worry much about the pending increase in volatility as current market conditions are ideal for short term trading. Until next month, trade well.
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