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Fed, Earnings to Test 'January Barometer'

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January 26, 2015

January’s final week is the busiest so far for this round of quarterly earnings. The economic calendar is chock-full, too, including a Federal Reserve meeting scheduled for Wednesday afternoon. It’ll be the first we’ve heard from the Fed since several global central banks took action to pump up their economies, which begs the question: Can the U.S. forge ahead with monetary policy in marked contrast to the rest of the world?

Before we even get to the Fed mid-week, Europe’s monetary policy and economic challenges bubble up yet again as financial markets digest a Greek election victory that hammered its stock market.

With such a crowded week of potential catalysts, low volatility levels could be challenged.

The CBOE Volatility Index (VIX), the market’s “fear gauge,” dropped 4.3 points, or 20.5%, last week (figure 1). The bulk of that decline was realized on Thursday when the S&P 500 (SPX) scored a 31-point gain and briefly moved into positive territory for 2015 before dropping some 11 points on Friday. That late-day move was marked by another notable shift into the bond market for some major players.

Still, the SPX move was enough to nudge it back above its 50-day moving average for the first time since very early January.

FIGURE 1: The CBOE Volatility Index (VIX) lost ground last week, closing well off the closely watched “20” line. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

A Telling January?

January brings with it a different sentiment assessment—one based on history, the season, and a little superstition tossed in.  According to the “January Barometer,” the first month of the year sets the tone for the entire year. That is, if the S&P closes higher in January, it is likely to be in the black for the entire calendar year. According to Stock Trader’s Almanac, the January Barometer has a 76.6% accuracy rate.

The SPX is down just a few points year-to-date thanks to last week’s 1.6% gain. So the market action over the next five days could dictate whether the market finishes higher or lower for the month. That, in turn, could set expectations for the entire year.

Turnaround in Earnings Tone?

It may be quite remarkable that stock averages held ground last week despite a sluggish start to the Q4 earnings reporting season. Of the first 77 companies to report (equating to about 22% of the total market cap of the S&P 500), results are up just 3.1% from the same period last year. Earnings gains come on a 2.1% increase in revenues. According to Zacks Investment Research, compared to other periods the results are, in a word, weak.

Profit reports from the remaining 78% of S&P 500 constituents are doubly important given the lackluster numbers so far; some 40% of the SPX will release numbers this week. There’s no shortage of usual headliners, including Microsoft (MSFT) on Monday, plus Apple (AAPL), P&G (PG), and Pfizer (PFE) on Tuesday.

Fed Focus Follows Greek Vote

Although earnings will be important, economic news shouldn’t be overlooked. A busy week of economic data includes durable goods, consumer confidence, GDP—the broadest snapshot of economic growth we’re privy to—and manufacturing readings. Weekly oil inventory data on Wednesday could motivate some movement in the energy markets, too.

There’s little doubt that central banks continue to help drive global markets, especially currencies, but bank decision-making has been complicated by the political picture. Global markets watched the tally in the Greek vote over the weekend as political and economic stability there risks crumbling. It looks as though the Syriza party will emerge victorious and although they have promised to roll back some unpopular taxes, provide relief to the poor, and write down debt, the truth is they may have trouble doing so and the intended actions of this anti-austerity party could put them directly at odds with other members of the European Union. 

Last week, the European Central Bank’s quantitative easing announcement (essentially a $1.2 trillion bond-buying program to add liquidity to the banking system) helped send equities in Europe sharply higher. Will Yellen & Company also offer soothing words when the U.S. Federal Open Market Committee (FOMC) wraps up its meeting Wednesday afternoon? No QE announcements or changes in rates are expected at this first meeting for 2015, but will members lay groundwork for future monetary policy?

As these macro drivers hit, the charts could come back into play. SPX’s defense of 2010 was a coup for the bulls. And now, 2058.9 becomes a major chart point to watch. That’s the closing print from the final trading day of last year.

Good trading,
JJ
@TDAJJKinahan

FIGURE 2: Weekly U.S. economic report calendar. Source: Briefing.com.

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