Earnings for S&P 500 Companies are Good – But all Eyes Turn to Europe

The S&P 500 closed Friday at 1,378 – about 45 points off it’s recent highs.

The markets, after a 3 1/2 month run of consistently higher prices, have found April to be a bit more challenging.

Below is a chart of the S&P from the most recent lows of October 4, 2011 (the start of the most recent move higher).  From December 19th – through April 5th you can see that the S&P 500 traded above it’s 50 day moving average for this entire period of time.  This was a very strong momentum move in the markets.

However, now you can see on the chart that the S&P 500 has somewhat violated the 50 day moving average.  The index closed almost exactly at it’s 50 day moving average of 1,379.

 

(Click on Image of Chart for a Bigger Picture)

 

 

The markets appears to be in consolidation mode as the S&P 500 digests some of it’s gains over the past 4 months.  Seasonality may also be a factor in the selling of stocks over the past 3 weeks as historically the May – October period are the worse performing months for the stock markets and traders might be getting a jump on this.  I would not expect the S&P 500 to be making new highs over the next 2-3 weeks but also I do not think this correction\consolidation  will go much lower than 1,340 either.

We are also in earnings season and so far most  companies that have reported earnings are beating their estimates.  82% of the companies that have reported earnings through April 20th have exceeded their estimates.  This 82% would be the highest level in years as the following chart shows:

 

(Click on Image of Chart for a Bigger Picture)

 

 

Typically, many of the stronger companies report earnings earlier in the quarter so we will monitor this “Earnings Beat Rate %” over the next three weeks to see if it continues.

I would like to alert readers to a couple of storm clouds that are on my horizon.  They are Italy & Spain.  If you recall back in 2011, the US Markets had a excellent first four months.  Then in May 2011,  the potential of a Greece Default started to emerge as a real possibility and this crises along with the USA Congressional Budget crises led to a 22% correction in the S&P 500 from May, 2011 to October, 2011.

Well today the Greece crises have been moved to the back pages but The Italian and Spanish potential of defaults have become more probable.  Credits spreads for both countries have soared to near 2009 levels.  Both countries economies have been severely impacted by their banking crises as unemployment levels – especially in Spain have reached our own Great Depression (1930’s) levels.

Below is a chart of the Italian Market (Milan) Index

 

(Click on Image of Chart for a Bigger Picture)

 

 

As you can see the last four weeks have sen a correction of 20% as Italy tries to come to grips with a solution for it’s Banking Crises.

Here is the Chart of Spain’s Markets as represented by the Spanish ETF.

 

(Click on Image of Chart for a Bigger Picture)

 

 

With this correction Spain Markets are trading at levels that are lower than they were during the worst of the 2008 -2009 global banking crises.

Both the total debts levels and the economies of Spain and Italy are significantly higher than Greece.

I think it will be wise to monitor the developments in Europe closely to see how the Banking crises will be addressed.  It is important to remember as we showed in a chart from an earlier post – that markets around the world are very correlated (the market generally move together in the same direction).

Below is a chart of 10 major countries stock markets and their performance from October 4, 2011 – March, 2012 that shows the correlation of all countries stock markets.

 

(Click on Image of Chart for a Bigger Picture)

 

 

It is also possible that unlike last year where there was a severe sell-off in the USA markets because of the European banking crises , this time the USA markets could be viewed as a safe haven for funds from overseas due to the improving economy and more limited exposure to Europe’s Banks.  If the USA would be viewed as a safe haven from another round of the European Banking Crises then that flow of funds would be very supportive of both equities and US Treasuries.

 

 

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