Why Oil Leads
Stocks finished lower yesterday, but off their lows of the day. The Dow Jones Industrial index finished lower for a third straight day. The advance may have slowed in recent days, but we’ve seen buyers step in at intra-day lows and it will likely be up to earnings whether the dip-buyers will make any money on recent purchases.
I reported yesterday that earnings estimates for the fourth quarter have barely budged higher, even as the economy has improved and spending has picked up.
But of course, the stock prices have certainly advanced. And that means that companies may need to beat earnings expectations handily to move share prices higher.
This would be a stark shift from 2010. Last year, record numbers of companies beat earnings expectations. And they beat by enough to keep their share prices moving higher. Now that prices have advanced dramatically, there is an assumption that earnings will be higher. Stocks could be very vulnerable if early earnings reports are not good enough.
*****Our first sample of earnings came from aluminum company Alcoa (NYSE:AA). Alcoa beat expectations by $0.02 on earnings. Revenues missed by a small amount.
If we can take Alcoa’s results as an indicator, we would say that investors appear focused on earnings growth. If revenues are close, that’s good enough.
We’ll know more this week as we get earnings from Intel (Nasdaq:INTC) on Thursday and JP Morgan (NYSE:JPM) on Friday.
Intel has not traded well after earnings for the last couple of quarters. So while we may have some upside going into Intel’s earnings, we could see a sell-off after.
*****I haven’t included any thoughts from Jason Cimpl here lately. Jason is the trading strategist for TradeMaster Daily Stock Alerts. He’s an excellent technical analyst and keeps his finger on the pulse of the market. In fact, I understand he gets up in the wee hours of the morning to check on the trading in Asia and Europe as part of his preparation for the day’s trading.
Of course, I have to take his word for this since I am not usually up at 3 am.
Anyway, Jason told his TradeMaster Daily Stock Alerts members this morning that he is watching oil closely:
I am watching metals and oil this week, and expect them to lead the charge higher. Oil, continues to like the $90 area. And the longer it stays near that price the more likely $99 becomes.
As you know, oil prices are one of our leading indicators for investor sentiment. Strong oil prices means investors are confident the economy is expanding. If oil moves higher, we can be confident stocks will, too.
Even though Jason is skeptical that stock valuations will hold at current levels over the long-term, he has maintained a relentlessly bullish stance since stocks started moving higher in late August.
He’s recommended 33 trades in that time, and 22 have been winners, with gains like 40%, 21%, 19%, 18% 16%, and 15% in a few weeks time. And right now, he has 5 positions open, all of which are up. One of them is up 39%, but as a long way to go to reach Jason’s target of a 100% gain.
But perhaps even more impressive is the skill with which Jason manages his losers. His strict, tight stop losses keep losing positions to a minimum. Since August, the biggest loser is a mere 6%. Most are 1% and 2% losses. That’s impressive.
