Sunday, July 25, 2010

Expect the rally to continue with more better-than-expected earnings

On the back of better-than-expected earnings from major companies such as Microsoft, Apple and Ford, stock markets have been rallying this week. The S&P 500 closed on Friday at 1,102.66, while the Dow closed at 10,424.62. For the week, the S&P 500 is up 3.55%, while the Dow is 3.24% higher. It is just as what I wrote on July 11, before earnings began, that “I expect markets to continue rallying...on the back of mildly positive earnings.”

From a technical perspective, the S&P 500 closed at 1,102.66 on Friday, which is just above the psychological 1,100 level for the first time in one month. In fact, the index is officially out of correction territory, being only down 9% from April's high. Another piece of good news is that, according to Bloomberg, of the 149 companies that have reported earnings since July 12, 85% have beat analyst expectations. This is significantly higher than the historical average, and much higher than last quarter's beat rate of 63.7%.

The completion of the Euro zone bank stress test on Friday, with its better-than-expected result of only 7 out of 91 banks failing, should remove some uncertainty for investors. In addition, earnings this week from companies such as Chevron (CVX), DuPont (DD) and Boeing (B) should continue to beat expectations. 

Thus, I expect North American markets to continue rallying this week. Of course, the factors that could dampen the rally are bad economic data from the U.S. and the Euro zone. For the Euro zone, Hungary is currently the country where bad news is most likely to emerge, due to its wrangling with the IMF and EU over a bail-out package. For the U.S., consumer confidence and weekly initial jobless gains data being released this week have the potential of weakening the rally.

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