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This summer it might be the U.K. that blows up the markets instead of Greece

Keith Bliss

By Keith Bliss, Cuttone & Co.

Earnings and the market

Two weeks in and I’m already earnings-weary. I suppose I need to recharge over the weekend as we have a very long way to go with a very heavy week ahead. Everyone agrees that the first two weeks have been lackluster from both an earnings and sales standpoint, yet the equity market has held up well. 

Many big names like JPMorgan (JPM), Goldman Sachs (GS), Netflix (NFLX), Qualcomm (QCOM), Visa (V), and Alphabet (GOOGL) showed top-line sales and bottom line profit declines, but investors have kept the market aloft by largely ignoring the weakness.

Amazingly, much of the bullish price action in any name that has reported thus far is due to that company beating the consensus Wall Street estimates—regardless of the absolute sales and earnings declines. Those that miss on the top line but beat on the bottom are rewarded. Those that miss on both the top and bottom are punished.

1,000 companies report next week

We can take a breath now, but not for long. The market is about to enter a critical week starting Monday.  More than 1,000 companies will be reporting, and we have a little get-together occurring in Washington, D.C. Moreover, some of the dynamics that have been pushing the market higher this month will end very shortly.

A lot will depend upon the reports next week and beyond and how they square with expectations. The thinking has turned back toward a longer-term accommodative interest rate environment in the U.S. And for the market to push higher, it will depend largely on earnings and the sales outlook.

Despite the positive momentum that the last two weeks have brought to the market, we see signs that it could stall out here and then ebb into the summer. The strong seasonal factors in April will end shortly, and we see the markets—particularly the S&P 500 (^GSPC) and Russell 2000 (^RUT)—faced with some very strong overhead resistance levels.

Additionally, equity mutual funds experienced another week of negative flows and the VIX (^VIX) is starting to come out of its mini slumber. I am not suggesting that a massive sell-off is on the near-term horizon, but the smart trader will take all of this into consideration for positioning. It appears that the markets will have a difficult time breaking out to all time highs anytime soon.

We still have international events that could escalate volatility very quickly

The list of international factors that can influence the U.S. markets never goes away and seems to be getting longer. These are serious issues and some will be of greater impact as we move through the spring.

The reason I highlight them now is that we see institutional money starting to get prepared for the British referendum coming in June. Recall that a potential Greece exit from the E.U. threw the markets into turmoil each time it looked likely to happen. Obviously, a U.K. exit would be even more damaging.

Indeed, the referendum in Britain is less than two months away and the drumbeat on both sides is beating louder. It is uncertain what will happen as a growing dissatisfaction in Britain is growing with being tied to economic policies from the Continent.

Along with this looming event, we still have the world economy in rough shape, Japan contemplating going deeper into the negative rate world, political anxiety in Brazil, and the uncertainty around oil prices.  None of this is helpful to the market going higher and it may prudent to take a step back—especially while we have the opportunity to do so.

Stay tuned in and stay switched on. Next week will be big.