The market continued higher last week. Financial stocks were particularly strong. Financials have a Rasputin like quality to them. They have tried to run themselves out of business, many succeeded, in a variety of ways over the past several years. The survivors are seeing buying pressure. The yield curve has moved in their favor over the past few months. In the past they came up with the new thing (CDS’s, CDO’s, NINA loans, no doc teasers, Latin American loans in the 70’s, etc.) when they wanted to show how smart they were. These actions lead to a great spike in revenues and then an eventual collapse. As long as they just stick to buying treasuries and making loans to the most qualified it would be hard for them to not take advantage of the current environment.
The metals complex came under intense selling pressure. Friday, China announced they were implementing another increase to its reserve requirement ratio. This lead to an acceleration in selling in gold and silver. The bulls will tell you that this brings the space back to support and works off speculative excesses, and the next leg higher. Time will tell.
Other commodities did well last week. The Agricultural Department, with its update for January issued Wednesday, sent corn and soy bean futures to levels not reached since July 2008. With inventory levels continuing to drop, prices have risen dramatically. The Agriculture Department forecasted higher prices based on surging worldwide demand while inventories are at abnormally low levels. Companies that sell agriculture related products responded favorably.
The S&P closed just over 1293 on Friday. In my piece "Riding The Fifth Wave" on December 13, I set a technical target on the S&P at a range of 1289-1292. The market did not take a lot of time to get there. Several influential earnings releases this week will have a real impact on how things go from these lofty levels. Apple, IBM, Goldman Sachs, Google, Bank of America and General Electric are companies that report earnings this week. Apple and IBM kick things off after the close today. The guidance they give for 2011 will be critical. This is a ready, fire, aim environment now. Do not be surprised to see companies give strong forward guidance. The market is strong and they will have 12 months to be proven wrong.
What now? Consensus analyst estimates for earnings of S&P 500 companies for 2011 is $94. Place a multiple of 14-15 on that number and you get a range for the S&P of 1316 to 1410 on the S&P. If you feel that is too aggressive then use your own multiple. Certainly, since we are just in January a lot can happen to influence that $94 target. For the first time in 82 years the S&P 500 has gone more than 30 days without closing below its ten day moving average. Technicians raise their support and resistance levels for the market each week. We are at the target I placed on the market for this Fifth Wave higher. With earnings season it is time for companies to deliver. The trend has certainly been the friend of the bulls since the beginning of December. The market is clearly overbought in the near term. In a trending market things can remain over bought/sold for quite a while. This week it's cards on the table time for many of the most influential companies in the market. Perceptions on individual companies and the overall market can change dramatically in response to earnings announcements. The market will react strongly to posted earnings and have more dramatic swings in response to forward guidance.
