Earnings Season’s Low Bar May Keep Wall Street Trending Towards the Upside

 

If you only have a hammer, you tend to see every problem as a nail. — Abraham Maslow

 

The pullback from the brink of the fiscal cliff gave investors sufficient reason to celebrate the first week of 2013 by going on a buying spree pretty much across the board of the equity market. Whether the move up was anything more than the equivalent of a sigh of relief from investors expecting the worst from a dysfunctional Congress shall be revealed in short order during the first full week of trading sessions this year.

The Dow Jones Industrial Average (DJIA) shot up a healthy 3.8% on the week, while the benchmark S&P 500 Index (SPX) topped that mark, rising an impressive 4.6% over the same time frame. The Nasdaq (COMP) performed even better, notching a strong 4.8 % over the course of the short trading week.

So now that the cliff has been knocked off the perch of investor focus, the numbers game known as earnings season will pick up steam and begin to suck up the attention of Wall Street this week, though a bare minimum of just five S&P 500 companies will be putting their bottom lines on display.

While the economy did inch forward at a slim but steady 2% growth rate over the third quarter of 2012, it is likely that all the uncertainty surrounding taxes and spending cuts that occupied Wall Street conversations for the last several months will prove to have a real impact on corporate profits, as spending on research and hiring was kept to a minimum.

With expectations along these lines, analysts have tended to revise downward corporate earnings, particularly in the banking and tech sector.

The lowering of the bar may prove to be a catalyst for a strong up-trending market, if the projections can be met or perhaps topped. If this occurs, and the economic numbers out of Washington can remain towards the positive, particularly in jobs and real estate, the first quarter may mirror that of 2012, when the S&P 500 index shot up by double digits.

What the Periscope Sees

For the first week of the New Year, the Health Care Sector can be found atop the Sabrient SectorCast ETF Rankings. The Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and is revised on a weekly basis.

Here is a list of some of the last year’s top performing Health Care ETFs, along with the current Year-to-Date returns as of the first week of January.

XLV — Health Care Select Sector SPDR Fund, +2.56%

IBB — iShares Nasdaq Biotechnology Index Fund, +3.94%

VHT — Vanguard Health Care Index Fund, +2.69%

IYH — iShares Dow Jones US Healthcare Sector Index Fund, +2.53%

FXH — First Trust Health Care AlphaDEX Fund, +2.76

As an alternative to buying the ETFs themselves, consider buying long call options as a way to leverage your portfolio’s funds. April expiration calls that are several strikes out-of-the-money are good candidates for options with a relatively low rate of theta decay.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.