By Shah Gilani, Shah Gilani – Total Wealth Research, 2024-07-29
Like a toddler trying to fight off sleep…
The markets also tried to fight off their weariness late last week.
But that rally didn't impress me.
I want to see three critical levels of support in all the major indexes – the S&P, the Nasdaq and the Russell – to convince me that we're back in business.
But with some major earnings reports coming out this week… we'll also get some real direction from those results.
Plus, the markets are looking for some hint this week from the Fed about a rate cut.
Tune in to your Monday Takeaways for my unfiltered analysis on what's moving your money.
Click on the thumbnail below to watch.
Transcript
Hey everybody, Shah Gilani here with your Monday Takeaways.
First off, we have to take a look at what happened last week.
The end of the week, we saw a pretty strong rally come out of nowhere. The expectations were maybe the economy's not doing as well. The Fed is going to cut, and this is all going to be good.
Maybe it's just going to be a Goldilocks landing, no recession kind of landing, and the Fed will simply cut all the rest of this year from September on. And, of course, stocks are going to rally and everything is good.
And that seems to be what happened at the end of the week.
But you look at the charts, and the only thing that was really impressive was the bounce that the Russell 2000 had.
As far as takeaways from last week, let me tell you what I see.
As far as the S&P goes, I'm going to get into some of the S&P earnings from last week and where we are so far in the earnings cycle.
And in terms of numbers and beats and how much companies have been beating by revenues and earnings, let me just say, big picture wise, as far as where the market was headed and what it ended up doing at the end of the week, as far as S&P, I'm not really impressed.
The S&P, yes, had a little blip on Friday. It looked like it was going to try to do better.
Futures so far this morning looked better like there's some momentum from Friday trying to push stocks higher.
But the S&P needs to get above 5,500 and stay there, and consolidate above there for this blip and for whatever we're seeing this morning and whatever we might see early this week to basically be a point of consolidation for the S&P where it has a chance to go higher, make new highs, and keep going higher. Otherwise, not so sure this selloff hasn't seen maybe the worst of it.
That's my opinion looking at the S&P. Nasdaq Composite, same thing. Yes. A bounce on Friday. As far as the composite goes, it has to get above 17,800 and stay above there and consolidate above 17,800 for that index to show me that it can consolidate, it can continue to go higher. Otherwise, it's running a little bit of a knife edge there. The QQQs, the Nasdaq 100, as far as looking at the Nasdaq 100 through the QQQ, I see the same thing.
They need to get above 475 and stay there. So not so great looking. The IWM, on the other hand, was this, holy mackerel, the week before, over 10 trading days, the IWM, the Russell 2000, was up 10.5%.
Talk about outperformance. That's a three standard deviation move relative to what the S&P did over the same period of time. It looks a little bit lofty as far as I'm concerned. So as far as IWM, yeah, it had a great bounce at the end of last week.
It looks really good. And it's just inches away from its all time high here. At 226 today, it has to get there, and I think it can get there very easily. But it has to kind of stay there.
If things start to teeter a little bit and the broader indexes start to come down, then I think the IWM comes back down because it's just all of a sudden, there's just a lot of profit taking to be had there.
That being said, the IWM is really what everyone's watching because this rotation idea, that there's so much concentration in the Mag Seven and the big tech and all of the whether it's some of the industrials that got chased higher or the financials that got chased higher that, hey, let's look at the underperforming sector.
Oh, that would be the small to mid caps. Oh, that'd be the Russell. Boom.
Positioning, as far as I'm concerned with my trader's hat on, I'm telling you, that was a positioning rally in IWM. Fundamentally, I don't think it justifies the kind of move that the Russell has made, and I don't think it justifies that as far as being sustainable because the fundamentals just don't support it.
Now, on the earnings front, this is from FactSet, some pretty cool numbers from FactSet as always, from FactSet. We're about the midpoint, about 41% of S&P 500 companies have reported. And here's some of the cool stuff that FactSet had out this morning.
The percentage reporting, percentage of companies that have reported, 41% of the S&P 500 companies that have already reported.
Of those, the percentage reporting positive earnings surprises versus the estimates for those earnings is above the 5- and 10-year average, which is pretty good.
But the magnitude of the beats is below.
It's their 5- and 10-year averages. So 78% of the reporting companies, of the 41% of the S&P 500 companies, 78% of those that have reported, reported actual earnings greater than the estimates.
The 5-year average is 77%, so that's pretty good. The 10-year average is 74%. So coming in at 78% beats over estimates, that's pretty good.
But the reporting of the actual earnings above estimates was not so good.
The EPS above estimates is about 4.4% above what the estimates are for the earnings for the companies that beat.
The 5-year average is a beat of 8.6%, and the 10-year average is a beat of 6.8%. So, yes, just a tiny slim margin, but better than the 5-, 10-year averages are reporting beats on estimates of earnings versus the estimates for those actual versus estimate. But you're not beating by a whole lot relative to the norm.
4.4% is half of the 8.6% 5-year, and around 50% below the 6.8%. So not so great on the kind of beats.
The earnings growth rate still overall looks good about 9.8% so far, and that's a positive.
But revenues aren't doing so well either.
Revenues about 60% of the companies so far reporting have beaten estimates for their revenues.
60%.
But the 5-year average is 69% beating.
The 10-year average is 64%. So, again, revenues look like, yeah, 60% of them are beaten analyst estimates for what their revenues would have been. But, actually, they're not beating by significant enough amounts that say, oh, that's the trend is really good. It's probably the opposite.
So, overall, I think earnings are pretty good. Not great for sure, but concerning. Now this week, wow. Talk about takeaways.
We got a few names coming up this week.
We got Microsoft. We got Meta.
We got Amazon. We got Apple. We got AMD. We got a lot of companies reporting this week, and investors are going to be hanging on their earnings.
They're going to be hanging on everything from revenues, especially from Microsoft and for the likes of Amazon, the cloud, Apple. Oh my gosh. Apple's going to be, it's going to be they better beat, they better beat well. If Apple disappoints sorely, then the stock's going to make a little bit of a u-turn.
But the prospects are for good numbers out of these companies.
Surprises to the downside could turn this nascent rally off the recent turnaround and the hope that we're going to be bouncing into a nothing burger. So going to be keeping eye on that.
So, of course, we had the Fed this week. Nobody expects a rate cut announcement, but what everyone is seemingly expecting is some hint that maybe September, you'll see a cut.
And it's going to be about the labor market. It's going to be about nonfarm payrolls this week. It's going to be about, what that number comes in at. So a lot of metrics this week to watch, including, of course, earnings.
Probably first and foremost is earnings. Fed meeting's going to be very interesting one way or the other or maybe not. If everybody expects the Fed to say something positive about a rate cut coming this year, pointing to concerns about the labor market, then that'll be a rah rah, Fed's going to cut and the markets will rally.
If the Fed says, no, right now, we're staying the course. Things look pretty good, and we are continuing our battle on inflation, which we're doing well with, but we're not done. Then they might investors might scratch their heads and go, wait a second, does that mean we're going to get a cut in September?
That may not be so good for the market because it's at a tenuous place. The takeaway from all this is, you have to keep your eye on the prize because the market is at a very interesting juncture right here.
It's going to try it looks like it wants to try and consolidate a little bit of gains that they accomplished at the end of last week. And if they can do that, then great. But they got some high hurdles to get up and hold. If not, then I don't think this mini little correction is done with. And those are your takeaways for this week. I'll catch you guys next week. Cheers.
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