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DOW Surges Past 18,000

Last month we looked at how the DOW was getting close to the key 18,000 mark and wondered whether it could break through this level and make new highs for 2015.

Earnings Catalyst For DOW Rally

To put a bit of context around this 2 week rally, the DOW rose 12% which is it’s best 2 week performance since 2000! And it’s not just the DOW that’s benefited, the S&P and Nasdaq have also surged upwards by similar percentages. This sharp run-up in the major US Indices has been mainly driven by some strong Q2 results from a lot of the blue chips. Of the S&P 500 companies who have reported Q2 earnings so far 77% have beat analysts estimates, albeit these are greatly reduced estimates, by an average of about 15%. The continued stream of earnings beats has given the market the incentive it needed to drive higher after its mini-pullback earlier in July.

Tech Still Leading The Way Higher

Not to be outdone by the DOW the Nasdaq has been setting records of it’s own…Prior to it’s small 0.4% pullback last Friday the Nasdaq had just completed a 12 day winning streak, it’s longest winning streak since 1992. I was a bit surprised when I read that the tech index hadn’t gone on such a winning run in so long and that even right throughout the tech bubble of 2000/2001 it never achieved such a feat. It was disappointing results from Microsoft that ultimately lead the Nassy lower on Friday, one of the few big tech companies to miss estimates. Prior to Big Blue’s results it was all bright and rosy in the world of tech with excellent results from Apple, Google, Intel and Amazon to name a few driving the Nasdaq onwards and upwards on a daily basis.

Apple once again did it’s usual party trick of blowing away it’s own very conservative guidance and the Street’s slightly less so conservative expectations. After an almost $20 run-up in it’s share price in the couple of weeks prior to announcing it’s results to $120 a share I wondered could Apple continue higher, well there was no need to fear, it’s added another $10 a share since last Wednesday’s results. The results themselves were very impressive, Apple just can’t ship it’s products quick enough, particularly it’s iPhones where it sold 5.2 million of those bad boys last quarter and is “currently experiencing some supply issues”. While in most cases supply issues would be a cause for concern, like when Boeing can’t get it’s new airbus out in time to meet contracted delivery dates, in Apple’s case it’s a very positive sign. With Apple it’s simply a case that they can’t manufacture enough iPhones quick enough. We shouldn’t really be surprised, with stories of 15 minute delays to just get to talk to an employee in Apple’s stores in the US and if anyone here in the UK has tried get their hands on a new iPhone 5GS recently I’m sure you too have being met with the response that sorry but they are currently not in stock….

Should We Be Concerned?

But should we be concerned about all this bullish talk, bottoming out became green shoots which  have now become talk of a proper recovery. What would concern me about this recent results driven rally is that the earnings beats have all come from an EPS perspective. In a lot of cases however when we look at the underlying results revenues continued to fall but it was the results of aggressive cost cutting programmes that meant profits held up and EPS looked good when compared side by side with what the Street’s analysts were expecting (analysts who had already slashed earnings expectations drastically in the face of the global economic environment these company’s were now operating in). So while I appreciate it is all about the bottom line, surely part of it must be about how that bottom line is achieved? And if chief executives are delivering that bottom line by cutting back staff numbers, reducing production levels and slashing spending rather than growing revenues, the question has to be, how long can they continue to do that for before they run out of costs to cut??

Certainly there are some positives out there, the global credit markets are at last starting to thaw and the US housing market is starting to pick up also with the number of housing starts announced yesterday up 11% month on month. But with US unemployment figures contining to rise (although at a lower rate) do the US public really have money in their pockets to spend? It will certainly be interesting to see if the US companies can continue to beat the street’s expectations in Q3 and Q4, especially as Wall Street’s analysts are likely to increase their expectations in light of what has happened in Q2.

The market is clearly in overbought condition right now and a pullback, at least short-term, is probably on the cards.  Keep your stops tight and be ready to go short if this run-up eventually runs out of steam.

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