35% Upside for S&P This Year
So far so good!
The stock market continues to follow a bullish script into mid-January.
Yes, we had a dismal December. It seemed like everyone who wanted out of stocks got out of stocks.
This resulted in the Christmas Eve massacre. The Dow dropped over 650 points during the half-day session, which is historically bullish.
But before folks could throw in the towel, the Dow reversed course with a vengeance, gaining over 1,000 points the day after Christmas.
Since then the Dow has been up 10 of the past 12 trading sessions. Helping folks rack up gains of 10% along the way.
And flying under the radar was another important bullish signal.
Over these past 12 sessions stock markets experienced not just one, but two bullish breadth thrusts.
Contrary to Popular Belief, This Is NOT Yoga Terminology
A breadth thrust occurs when 90% of total trading volume flows into advancing stocks. This signals a stampede of buy orders.
It’s a rare and bullish signal. In fact, 90% of the time it indicates a change in trend to the upside for stocks.
Since 1940 there have only been 16 bullish breadth thrust signals. During the year following those occurrences the S&P 500 rose more than 90% of the time.
The average gain during those years was 22%. That’s about three times the upside appreciation compared with any other random one-year period!
In short, and as I wrote to my paid-up readers of my Infinite Income service this week: “The worst is likely over, and the best could be yet to come.”
Now, Here’s What to Watch for Next
Fourth-quarter earnings reports will grab investors’ attention and steal the spotlight over the next several weeks.
Remember, earnings season is a game of expectations versus reality. It doesn’t matter what the final profit growth number is for the S&P 500 Index. What matters is whether or not companies deliver better or worse numbers than expected.
With that in mind Wall Street analysts were busy cutting S&P profit estimates during the fourth quarter.
This is really no surprise.
After all, the S&P 500 Index tumbled 20% during the quarter. It’s no wonder Wall Street has been in a grumpy mood and lowering profit targets.
In fact, fourth-quarter earnings estimates for the S&P declined 3.8% during the quarter, according to FactSet data.
Is that good reason to hit the panic button as earnings season gets underway?
Over the last 10 years, the average decline in quarterly profit estimates has been 4.5%.
In spite of rampant pessimism, recent cuts are LESS than usual.
As Usual, Wall Street Has It Backward
Of course, you won’t hear this from the financial media. The talking heads are overly pessimistic about these earnings estimate cuts.
Falling profit estimates lower the bar, making it easier for a company’s actual results to beat forecasts.
But, remember this.
The biggest cut to S&P 500 profit estimates in the past five years was in the first quarter of 2016. At that time estimates plunged 9.8%.
Pessimism was rampant on Wall Street then, just as it is today. But guess what?
The S&P 500 Index soared 35% over the next two years.
I expect we could see a similar uptrend again.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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