Capital Wave Forecast: Signs of Optimism Despite the Economy Slip-Up
Shah Gilani|April 27, 2020
| Editor’s Note: The cat’s out of the bag – on Friday, I announced that I’m hanging up my hat and passing the torch to my friend and colleague, Mr. Shah Gilani. Shah and I have known each other for 20 years, and there’s no one I trust more to guide us – that’s right, I’ll still be following along as a subscriber! – on our path to Total Wealth. Shah gave me an inside look at what he sees this week, and you can check it out below. Thanks, as always, for being part of the Total Wealth family! -KFG |
It doesn’t matter that it seems crazy, and it yet may be just that, but investors are betting the worst’s behind us, at least for markets, and the other side of all the panic and shutting down is here.
After all, countries are reopening. Businesses are reopening. And people just want to go out.
Putting aside the economy’s slide, things are looking up.
Putting aside the economy’s slide, meaning the expected drop in GDP (we get the first look at Q1 GDP on Wednesday where expectations run from -0.3% to -10% and Q2 expectations run from -25% to -38%), equity investors have been buying, maybe not the whole market or even the most beaten up stocks, at least the big-cap movers, and making the markets look attractive.
Last week was a down week, but not a depressing week, unless you owned oil futures.
The Dow ended the week off 1.9%. However, it was down 37% at its lows, and is now only down 19.6% from its highs. That means its up 28% off its lows
The S&P 500 ended the week down 1.3%, was off 34% at its lows and is now only 16% off its all-time high and is up 27% from its lows.
The Nasdaq Composite closed the week down a paltry 0.18%. It dropped 30%, is down only 12.2% now, and is up 26% from its March lows.
That’s what I call looking up.
The question of whether it’s a “head fake” like the rise off the 1929 crash lows, which were followed by another downturn that ended up knocking 86% off the market from its peak highs, is what we’re witnessing, or whether the market’s right to look at the glass half full and the economy opening up, and the worst of the virus’ effects behind us, is an ongoing tug of war.
We get 142 S&P 500 companies reporting earnings this week, a similar number reporting next week. So, it’s going to be a big couple of weeks on the earnings front.
So far, with about 24% of S&P companies reporting, earnings are down on average 15.2%. Expectations for the rest of reporting companies is that they’ll average around that mark. Expectations for Q2 earnings is a drop of maybe 32%.
If that’s the worst of it, maybe the fact that earnings dropped 55% (over the two years) resulting from the financial crisis, makes investors optimistic.
Then again, the speed which earnings and revenues have dropped this time around is unprecedented.
Still, it seems markets believe the massive liquidity provisions that have ballooned the Fed’s balance sheet 58% to $6.5 trillion in two months, combined with fiscal lifelines, is enough to hold the bottom, that bottom having been reached in March.
As much as I’m prone to being bearish on the economy, very bearish I might add, the market isn’t the economy. At least is isn’t following the economy. And it can continue higher because there’s room overhead and something of a vacuum to fill.
Earnings, if they’re better than expected, will be a catalyst this week and next week. If they’re not good but not bad, that will be another potential catalyst. It’s only if earnings are horrible, or the big market cap leading stocks, Amazon.com Inc. (NasdaqGS:AMZN), Facebook Inc, (NasdaqGS:FB), Microsoft Corp. (NasdaqGS:MSFT), Alphabet Inc. (NasdaqGS:GOOG), and Apple Inc. (NasdaqGS:AAPL) (20% of the market) fall out of favor (not likely), then investors might start taking some profits.
It’s not entirely safe out there yet, because the economy is still headed down a dark hole, but as long as investors are looking up, nibbling on momentum leaders and some select buying isn’t a bad idea.
Just be ready to take profits and reverse course at a moment’s notice. Because we’re not out of the woods yet.
The Dow has support at: 23,515; 23,483; 23,339; 23,095. And resistance at: 24,040, 24,250, then 26,000.
The S&P has support at: 2,794; 2,775; 2,760; 2,721. And resistance at: 2,844; 2,880; 3,000.
The Nasdaq Comp has support at: 8,613; 8,560; 8,464. And resistance at: 8,642; 8,670; 8,705; 8,925.
Take some risks out there, but be mindful.
Sincerely,
Shah