What Will This Week’s Earnings Season Bring?

At the beginning of this last week, the Market was flying again. Perhaps because Wednesday was the 4th of July. Perhaps because they knew that on Friday the unemployment numbers were not going to be wonderful and would like cause the Market to come back down. Taking no chances, institutional traders ran the S&P 500 ran back up to 1374. And by Thursday, the Dow had regained 12,955, looking as if it were going to break back above 13,000. Could the Market recover all it had lost in May? But Friday came and took the wind out of the Dow’s sails, dropping the Dow back down to 12,778.

Despite the run of the Market throughout June and now July, what makes no sense is why U.S. Treasury Bonds and Notes continue to fly higher? Traditionally, stocks and bonds/notes have what is known as “negative correlation.” Negative correlation refers to a relationship between two Markets in which one Market increase directly proportional to the other decreasing. In the case of stocks and bonds/notes, when the Stock Market rises, bonds/notes fall, and vice versa. When the Stock Market rises, investors feel that their return on investment is much better by purchasing stocks and securing dividends. But when the Stock Market falls, investors flee to bonds or notes as a flight to safety.

What is just not easy to explain this week: why did bonds/notes not retreat? All the while the Stock Market was flying up, the bonds and notes alike stayed flat. They did not rise, but they did NOT fall as expected. In fact, by Friday, the 10-year Note had exceeded 134. So what does this show you? Why are investors flocking to treasury bonds and notes when the Market is making a strong recovery? What makes this especially confusing is that right now the yield on the 10-year note is just 1.54. Again, why would anyone run to buy Treasury Notes with almost no yield?

What also makes this preference so unusual is that the U.S. economy is not displaying a significant recovery. The unemployment number, 8.2%, did not improve from last month. In fact, the actual new jobs made was only 84,000. April’s job gains were revised down to 68,000 from 77,000. Discouraged job-seekers, including those who can’t find work, part-time workers looking for full-time employment, and the unemployed now stands at 14.9%. The only plus side was that the temporary workers number rose by 25,000, but again those are temporary jobs.

Now add to this was the fact that June saw the manufacturing sector contract with retail sales also being weak. Both ISM Manufacturing and ISM Non-Manufacturing numbers were less than forecast. And as the third quarter gets underway, US GDP is forecast to have slowed to 1.9%.

Yet with all the difficulty the US economy is having, the Dollar Index has not fallen. On Friday, the Euro fell once again against the Dollar to close at 1.2283 with the DX closing above 83 at 83.495, nearly the highest in 2 years.
Given that institutional investors are more likely to invest in US Treasury Bonds and Notes over retail customers, it is clear that they have been buying these treasuries all the time the Market has been running back up, quietly, behind the scenes. Now third quarter reporting is about to begin on Monday, with Alcoa reporting after the Market closes. The aluminum producer is only forecast to post a 5 cents earnings per share, down from 32 cents one year ago. Unfortunately, Alcoa, having become the worst performer in the Dow Jones Industrial Average, being down 46%, is looked upon as a bellweather for the rest of earnings season.

Alcoa is not the only question in everyone’s mind as earnings season begins. On Friday, JP Morgan is set to report. Already the $2 billion loss has become more like $4-6 billion. How will this affect its quartly earnings? And more than that, like Barclays Plc, J.P. Morgan is also under investigation for rigging the London interbank offered rate. Barclays paid $452 million fine and saw their CEO resign. How much will JP Morgan pay if similar charges are substantiated? And this time, will Jaime Daimon’s job as CEO be ended?

If Alcoa and JP Morgan do not report well, could this be why institutional customers have been quietly buying up US Treasuries behind the scenes and sending the Dollar Index to its highest in 2 years? In a few days, we’ll all know what’s really going on.

Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.

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