“IAM” is the online name of one of our professional trader friends who writes a respected private newsletter to be shared with just a few friends and colleagues. He lets us share the newsletter with you, our readers. We offer it to you largely unedited, so you can see how professionals think and what they talk about. All views belong to the writer.
There are a number of ways the market can place value on itself. One way is to pullback while earnings play catch up. Another is to go sideways as earnings play catch up. If earnings guidance indicates less the market will retreat and assess future opportunity. Earnings have continued to do what is indicated and move higher than previously thought. IRHO, the next part of the equation will be earnings guidance for Q4 and Q1 to be reported April through June. Q2 earnings will come next and then guidance.
The Fed will most likely raise rates three times this year. Radar presumes this is consensus. With each hike there will be a growing anticipation of risk assessment that has run its course and have a collision with lower earnings and lower guidance eventually In a period of rising rates this is not indicating a good outcome. The Fed Announcement is Wednesday.
The market extended and held value this week, while earnings are modestly beating the consensus view. Radar always believes earnings drive the stock market. With this view in mind guidance now becomes the key ingredient.
Last week there were a deluge of negative articles. This week disbelief predominantly rules the articles I have read. Could it be full valuation levels will wake up and we have a correction? Will the market continue to extend and hold value? Reason and valuation tells us the market is full. Historically full. Q1 and Q2 2017 have earnings recession comparables that could.easily beat the prior four quarters. If you remember, it was an earnings recession. If we continue to see earnings guidance forecasting higher levels for the next two quarters and the Fed raises rates three times this year there will be a HIGH LEVEL probability of a poor outcome. Until earnings waver or there is a threat to growing earnings, the market will continue to march higher. The conclusion Radar comes to is there will be a beat down coming.
The trouble with analysts is in trying to call the top. Earnings will call the top. No one knows when the inflection of lower earnings will begin to appear. Mark Radar’s words…When the inflection in guidance comes or earnings begin to disappoint that is when we will have seen the top.
There are events that generally occur when the season of bubble bursting is extremely ripe. So far the bond market has signaled to be on alert! Shortly, Radar will repost “Bubble Bogies.” These are things that have occurred in market bubbles that signal air is about to come out of the balloon.