Earnings floodgates open this week, with financials up front, giving traders a peek at the latest quarterly results and Corporate America’s outlook for 2014. This means that until we get a little closer to the Federal Reserve meeting at month’s end, earnings look to drive the action.
Although the underlying tone of trading seems a bit cautious ahead of the bounty of earnings reports, volatility remains at low levels, and sentiment seems predominantly bullish. Still, many investors may be waiting to see if corporate profit growth in 2014 can justify the nearly 30% rise that pushed the S&P 500 (SPX) to record highs in 2013, levels that are so far holding up in 2014.
One sentiment measure, TD Ameritrade’s Investor Movement Index®(IMX®) has increased when investors increased their exposure to the market. IMX improved to 5.62 in December (figure 1), from 5.42 the month before. The indicator surpassed the previous record of 5.56 set in June 2011. The higher reading from IMX seems to suggest that investors collectively became more confident last month.
Figure 1: Detail of recent IMX movement, up for the third straight month in December. Source: TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. The IMX is not a tradable index.
On the other hand, the CBOE Volatility Index (VIX) has hardly budged in 2014. The market’s “fear gauge” tracks the implied volatility priced into S&P 500 Index options. VIX hit an intraday high of 14.59 on the first trading day of the year but drifted lower in the days that followed (figure 2). It’s been in a range of around 12–13 and sits at roughly the same levels as a year ago. I will continue to watch the 10-year Treasury yield, which slipped under 3% last week. Will it go back to 3% or can it go under 2.8%?
Figure 2: One-year view of CBOE Volatility Index (VIX) on TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Here Come the Banks
Many of the big financials report in the days ahead. Wells Fargo (WFC) and JPMorgan Chase & Co. (JPM) release their results Tuesday morning.
I talked in recent blogs about the SPX testing the 1850 level. Now that we’ve hit that mark, we’ll likely need strong financial sector results if we’ve got a chance at 1900 in coming sessions.
Meanwhile, Bank of America (BAC) reports Wednesday. Citigroup (C) and Goldman Sachs (GS) are among the names reporting before the opening bell Thursday. The world’s largest chip maker, Intel (INTC), reports Thursday afternoon. Morgan Stanley (MS) and General Electric (GE) are slated to release their results Friday morning.
Boring Beige?
On the economic front, the Wednesday afternoon release of the Fed’s Beige Book offers a qualitative look at economic conditions from each of the Fed’s districts. See the full line-up of economic releases in figure 3, below.
Jobless benefits claims, which will be released Thursday morning, might take on added importance in the weeks ahead after December payrolls fell well short of expectations. The Labor Department said Friday that the U.S. economy added just 87,000 jobs last month. Industry economists were expecting to see nearly 200,000 jobs created during that period. The number was such an incredible outlier that Wall Street discounted much of the report and now we wait on revisions released next month. Admittedly, there were a few things to be concerned about in the report. Chiefly, the civilian job market participation rate fell to 62.8%, matching a 35-year low.
The Fed has made its monetary policy plan known and officials are likely to offer additional clarity when they conclude their meeting on January 29. Let’s see what they thought about that dud of a jobs report. Until then, economic data could play second fiddle to corporate earnings
Good trading,
JJ
P.S. Connect with TD Ameritrade’s Nicole Sherrod on Twitter and Facebook and myself on Twitter and Facebook throughout January for options strategies, market observations, and more. One a day for 30 days.
Figure 3: Weekly U.S. economic report calendar. Source: Briefing.com.
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