A persistent theme for 2017 has been stocks surging to record highs during each quarterly earnings cycle. The first three quarters of 2017 earnings have seen a series of 6-week explosions to the upside: February, April-May, and July. In fact, removing these three 6-week surges would leave the stock market completely flat for the year through August. The current earnings cycle is different. The predictable 6-week run to record highs this time has occurred prior to the the deluge of earnings releases. Could the expected corporate profit reports have been overly anticipated, mostly reflected in the current peak?
Normally, we would look for a strong market rally to begin now and carry into late November or early December. However, with so much buying power used up before the earnings onslaught, we suspect that momentum will be waning as we move into November. Correction risk may be minimal until we get past the earnings release climax around the 2nd week of November. The surprisingly positive earnings reports by IBM and Adobe this week are examples of why it’s a fools errand to call a market top without seat belts. Are there areas of technical concern? Absolutely! The small cap stocks along with sentiment measures such as put/call option ratios and CNN’s Fear and Greed Index have clear negative divergences throughout October with the major indices of the Dow and S&P 500 Index.
This post was published at FinancialSense on 10/19/2017.
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