Will Earnings Meet The Market’s Expectations?

As a follower of U.S. politics and the stock market since Watergate, the developments in Washington, D.C. last week were something I never imagined I would see. Many I know were transfixed by the news for the entire afternoon last Wednesday. However, that did not stop the buying on Wall Street, which persisted all week.

Politics news aside, this was a surprise to many after how the week started. The S&P 500 had opened higher Monday after a nice overnight rally, but the sellers quickly took over. By 12:30 PM ET, the S&P 500 was down 2.5% for the day, but it rallied into the close to settle down just 1.48%. As the chart above from AdvisorPerspectives shows the S&P 500 spent the rest of the week climbing to with new highs.

Monday’s decline was blamed on the continued climb in COVID-19 cases in the U.S. and the lockdown in the UK. The decline did trigger some momentary panic, but the major averages held their monthly pivot support before turning higher. The decline may have taken the nervous investors out of the market, which helped the market from declining more on Wednesday afternoon and the rest of the week.

Even the weaker-than-expected monthly jobs report on Friday only triggered some morning selling. By lunchtime, stocks were rebounding to close the week at record new highs. It was another solid weekly performance, led again by the small small-cap iShares Russell 2000 (IWM)
, which gained 6% for the week. The Dow Jones Transportation Average, another value play, gained 3%.

There were solid, but less spectacular gains of around 1.5% in the Dow Jones Industrials, Nasdaq 100
, and S&P 500. The SPDR Gold Trust (GLD)
and Dow Jones Utility Average were the losers, as GLD was hit hard early Friday on fears that the widely-supported $2000 stimulus checks were now unlikely to be approved in the Senate.

The stock market’s strong action since June was forecast in advance by the NYSE All Advance/Decline line. It made new highs in early June (point a), which was a sign that the market could go higher. The A/D line made another new high during the week ending October 4 (point b). This was a positive sign for the stock market going into the general election, and this was also the case in 2004, 2012, and 2016.

The A/D line pulled back at the end of October 2020, but the pattern of higher highs and higher lows was not broken. Since the election, the A/D line has accelerated to the upside, making new highs each week, including last week. The fact that the A/D line is so far above its weighted moving average (WMA) does increase the odds of some…