This Week, Watch Earnings, Not Washington...

Michael J. Carr's picture

Monday, October 7, 2013 - 1:00pm

by Michael J. Carr

Stocks ended the week unchanged, but they should break out soon as earnings season begins.

Traders Seem Unconcerned By Washington
closed down $0.02 on the week, virtually unchanged from a week ago. Despite the small change in price, analysts were very active, explaining that the government shutdown was bad for stocks on days when the market was down and switching their story to say the shutdown had no impact on stocks when the market was up.

In the short term, the shutdown is not important to the stock market. However, due to the size of the federal government, a prolonged shutdown would probably have an adverse impact on the stock market.

According to data from the Federal Reserve, federal spending accounted for more than 22.5% of GDP, as shown in the chart below. A shutdown will decrease spending, which, by definition, will decrease GDP because GDP is the sum of all consumer, business and government spending. If this shutdown lasts for several weeks, there could be a pronounced economic slowdown.
While the shutdown and the upcoming debt ceiling debate make headlines in the next few weeks, traders will be closely watching earnings reports as earnings season officially gets underway. Standard & Poor's expects solid earnings growth this quarter, with analysts looking for an increase in earnings per share (EPS) of 11.54% compared with a year ago. This would be the fastest growth rate seen in two years.

As the above chart shows, analysts are expecting a rapid and sustained acceleration in earning growth. Traders should watch earnings reports rather than the news from Washington this week. If companies deliver strong reports, stock prices should be able to withstand the shutdown. If earnings disappoint, that will push stocks down even though the headlines will continue to talk about the shutdown.

I expect companies to meet expectations and continue to believe that any weakness in the market is a buying opportunity.

Gold Bear Market Enters Third Year
SPDR Gold Shares (NYSE: GLD)
fell 1.89% last week. Headlines blamed the decline on the government shutdown. Rather than trying to understand why gold fell last week, it could be beneficial to take a long-term view of gold.

Gold prices peaked in September 2011, more than two years ago.

Commodities tend to make spike highs and then form rounding bottoms over an extended period of time. One theory as to why is that when a commodity begins moving higher, investors rush in because they fear they will miss a big move. This leads to the sharp run-up.

Eventually, the commercials, the insiders of commodity markets, begin selling as much as they can because they believe the market is overvalued. This selling finally stops the price advance. Individuals then avoid the market for years because they remember their loss.

The same pattern can be seen in silver.

Many investors want to buy gold because it has fallen so much in the past two years. History shows that the decline could continue and the time to buy will be after a multi-year basing pattern develops. There will be short-term trading opportunities in gold and silver while that process unfolds, but for now, neither metal is attractive on a long-term basis or as a short-term trade.

This Week's News
Most economic news releases are on hold while the shutdown persists. This will allow traders to focus on earnings, and companies that beat or miss estimates may see higher-than-average volatility.

This article was originally published at
Market Outlook: Don't Get Fooled Into Thinking It's a Good Time to Buy Precious Metals

P.S. I'm a Chartered Market Technician, so I've seen enough charts in my day to know when a pattern is shaping up to be ... interesting. I encourage you to check out my colleague Amber Hestla's presentation to learn more about what the market's roller-coaster ride could mean for your portfolio. Click here to learn more.

Michael J. Carr does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.