Short-Term Bullish Signal As Earnings Season Kicks Off—It Has Happened Before

Earnings season kicked off last Friday with Citigroup, JPMorgan, and Wells Fargo all reporting third quarter results. Citi and JPMorgan both beat estimates while Wells Fargo missed.

The reports will continue this week and we will start seeing some tech companies report this week and next. This is on the heels of last week’s massive selloff in tech and that had some people questioning whether they wanted to be invested in the sector—or at least if they wanted to lower their exposure to the sector.

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Despite the selling, I got a short-term bullish signal from an indicator that I developed on Monday night. I call it my market barometer and I started tracking it at the beginning of 2009. It started with developing a bullish and bearish scan that I run each night as I looked for option trades. The inputs of the scans include overbought/oversold indicators, volume requirements, and price requirements.

After using the scans for a few months, I noticed a pattern between the overall market and the total number of stocks and ETFs on the bullish and bearish lists. That is when I came up with a formula to track the overall results of the scans and to use it as an indicator for the overall market. I have the daily results dating back to January 7, 2009.

Now that I have given you a little background on how the indicator came about, I can tell you that Monday night’s barometer reading was the second highest reading I have ever had. A high number is a bullish sign for the overall market for the next few weeks.

The chart below shows the barometer readings for 2018. The blue line is the S&P 500 and the orange bars show the barometer readings. You can see we had a very high reading on February 7, and that was just ahead of the big rally in February. You also see big negative readings ahead of the selloffs at the end of January and in April.

Because Monday’s reading was so high, I went back through the files to see where it stacked up against other high readings. Monday’s reading was second only to July 6, 2010. I went back and looked at what was going on with the S&P back in the summer of 2010 and I saw a similar setup to what we have now.

At the end of June ’10 and the beginning of July, we saw a pretty sizable selloff like we saw in the last few weeks. It would have been the beginning of an earnings season like we have now. I looked at the 15 days following the reading to see what happened with the indices and it was rather impressive. The S&P gained almost 8.5%, the Nasdaq gained 9.7%, and the Russell 2000 gained 12.74% from July 6 through July 26.

Seeing those results, I went to the third highest reading to see what happened on that occasion. The third highest reading came on November 28, 2011. This would not have been the beginning of an earnings season like July ’10 and the current environment, but the results were still pretty good. After 10 days the Russell was up 6.8%, the Dow was up 5.7%, and the S&P was up 5.3%.

The results were much better after 30 days of this high barometer reading. From November 28, 2011 through January 10, 2012, the Russell gained 9.6%, the S&P gained 8.4%, and the Dow gained 8.2%. The Nasdaq lagged the others during this period, but still gained 6.9%.

That high reading we see in February is the fourth highest reading and we see how the S&P rallied then. The S&P gained 7.7% in only 12 days after that reading.

The bottom line is that even though I have issued some cautious reports in the last few months, the short-term signal from my own barometer leads me to believe that stocks will move higher in the next few weeks. Of course there will be stocks that get hit due to disappointing earnings reports and the like, but the indices themselves should be higher according to my barometer indicator.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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