The Markets Look Toward Earnings Season

Last week, the Dow Jones Industrial Average managed to shake off the weak employment report, and it now looks ahead to the upcoming earnings season.

The Dow Jones Industrial Average (NYSEARCA:DIA) fell 0.2 percent for the week, slipping on Friday after the morning’s weak employment report. The SP 500 (NYSEARCA:SPY) closed the week 0.6 percent higher, and the Nasdaq (NYSEARCA:QQQ) climbed 1 percent week over week.

Friday’s big news was the shocking miss of the monthly Non Farms Payroll report that indicated the economy added just 74,000 jobs in December compared to last month’s 214,000 and expectations north of 190,000.

On My Stock Market Radar

While the Dow and the other major indexes managed to mostly shake off the weak jobs reports, attention now turns towards the upcoming earnings season. Alcoa (NYSE:AA) traditionally kicks off earnings season and the company’s shares were pummeled with a 5.4 percent decline on Friday when the company reported a first quarter loss. Sears also got whacked, down 13.8 percent, after it reported falling same store year over year sales.

Q4 earnings season gets underway in earnest this week and significant reports include:

Tuesday: JP Morgan, (NYSE:JPM), Wells Fargo (NYSE:WFC)
Wednesday: Bank of America (NYSE:BAC)
Thursday: Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Kaiser
Friday: Morgan Stanley (NYSE:MS)

On a technical basis, the Dow looks like this:

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Relative strength and momentum are both in decline, however, the index rests on significant support levels and remains well above its 50 and 200 day moving averages that are both still demonstrating up slopes in today’s ongoing bull market. So a correction of some magnitude could be expected, particularly if earnings season goes poorly, however, the chart still demonstrates expectations of a potentially shallow decline.

With the anticipated draw down of the Federal Reserve’s quantitative easing program, fundamentals like earnings, forward guidance and P/E ratios are likely to become more prominent in weeks and months ahead. Other factors like excessive margin debt, investor and adviser complacency and the upcoming debt ceiling debate could also be major factors.

Last week’s economic reports showed declines in ISM Services, consumer credit and new jobs. Good news came from gains in factory orders and a decline in the overall unemployment rate, although much of the decline was attributed to people leaving the workforce and no longer being counted.

Overseas, China’s Shanghai Composite (NYSEARCA:FXI) is down 10.5 percent since early December while France appears to be slipping back into recession, even as Spain, Italy and Germany posted slow but steady growth rate figures.

In addition to earnings, next week brings a full slate of important economic reports:

Tuesday: December retail sales

Wednesday: January Empire Index, Fed Beige book

Thursday: Philadelphia Federal Reserve Report, Weekly jobless claims, January home builders index

Friday: University of Michigan consumer sentiment, December industrial production, December housing starts

Bottom line: After a banner year in 2013, the Dow Jones Industrial Average and other U.S. and global indexes start the New Year on weaker footing. Things to watch are how the decline in quantitative easing is priced into the market and the outcome of the upcoming earnings season.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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