Global Macro: Focus on Earnings

TheStreet.com

NEW YORK (TheStreet) -- This week the market returns to trading on fundamentals. Investors are focused on earnings, and with the expectations that the Federal Reserve will end quantitative easing in September, sentiment will be determined by corporate performance.

The first chart below is of Guggenheim S&P 500 Equal Weight over SPDR S&P 500. This pair represents market breadth, the number of stocks participating in index moves up and down.

As equity markets reached record highs last week, this breadth indicator followed. That signals investors are adjusting positively to an economic environment without the Fed's bond-buying program.

If earnings are better than expected, this pair will continue to move higher, which is bullish for equity indexes.

The next chart is of Financial Select Sector SPDR over Guggenheim S&P 500 Equal Weight. This pair represents the relative strength of the financial sector versus a broader basket of equities.

Stocks in the financial sector are tied heavily to U.S. interest rates and economic outlook. As the Treasury yield curve has steepened, banks have been better able to lend long term at higher rates relative to the lower rates they borrow at.

Economic weakness and financial market volatility hurt the relative strength of the financial sector because sentiment plays a large role in lending. A gauge of consumer sentiment announced last Friday slightly missed expectations because wealthy individuals had a negative view on future long-term rates.

Once long-term rates reach a certain threshold, those looking to make purchases on credit will be weeded out.

If the economy continues to improve and sentiment remains at elevated levels, financials will continue to move up.

The final chart is of PowerShares DB US Dollar Index Bullish over CurrencyShares Swiss Franc Trust. This pair measures the strength of the U.S. dollar versus the Swiss franc, a safe-haven currency.

The dollar lost strength over the past few weeks as disagreement among Fed members over policy introduced volatility to markets. The dollar now stands at a point of yearly support.

Strong earnings and a possible outperformance of retail data should push the dollar higher this week. The stronger dollar should confirm that investors favor U.S. assets to other world markets due to the U.S.'s relative economic outperformance.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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