Perhaps QE Infinity came too early. As the effects of the stimulus hype wears off for many investors, the lack of another intangible catalyst to takes its place may be forcing investors to realize the cold, hard truth that the economy may continue to be weak for some time. It doesn't help that Wall Street's earnings estimates for the upcoming third quarter reporting season is as weak as investors have seen in years since the recession.
This week, we asked Toni Turner of TrendStar Trading Group what she's expecting to see with earnings season around the corner.
EQ: Since crossing $700 threshold and hitting its all-time high, shares of Apple have dropped about 6 percent since. Is the stock breaking down or could this be a buying opportunity for investors?
Turner: Apple announced over 5 million new iPhone 5s have been sold just days after it launched on Sept. 21. Of course, after that, CEO Tim Cook came out and apologized for the flaws in the new map app. Shares have been selling off a bit and consolidating since then. So now we look toward quarterly earnings, which comes out on Oct. 25. The consensus is $8.88 a share, compared to last year’s Q4 earnings of $7.05 per share. Technically, the stock is sinking toward the 50-day average, which comes in at $650. What I would expect to see is that it continues down for the next couple of days, but then we see a bounce at those levels, if not sooner.
However, there is one very unsettling fact that’s staring back at me from the chart. I see a possible head-and-shoulders formation on Apple with a neckline at $660. It’s a shallow head-and-shoulders . . . but it’s there. I hope, as the song says, that I have “Lyin’ Eyes” because a move below $660 or even below $650, is not only going to be bad for Apple, it’s going to be bad for the entire market. Apple has a big impact on both the Nasdaq and the S&P 500, and if we’re to continue this rally, we don’t want Apple sinking south.
EQ: You said in the past that fund managers will be doing some “window dressing.” Is Apple a top target for that?
Turner: I think so. The first week of every month is when portfolio managers get a new inflow of money and they have to put it somewhere. Apple’s P/E right now is at around 15 and they have that dividend, so it’s still a good buy here. But there’s a lot going on with it, and I would hesitate to say that I know which way it’s going. I just know technically speaking there are some short-term concerns, and even with earnings, they did miss last quarter, albeit slightly.
EQ: Expectations for Q3 earnings season are as low as when the market was in the middle of the recession in 2009. Are you anticipating earnings to be ugly this quarter or do you anticipate opportunities for more surprises?
Turner: Wall Street’s sell-side analysts expect S&P 500 companies to report a 2.6-percent year-over-year decline in third quarter operating profits. If that comes true, we’ll see the first drop in third quarter earnings in three years. We do have weak corporate revenues due to the anemic U.S. and global economies, and except for the most recent ISM manufacturing report, we have seen pretty ugly manufacturing numbers lately. So I see a choppy earnings season ahead.
However, we are now in Q4. The good news is November, December, and January are typically the best three months of the year, and the fourth quarter is typically the best quarter of the year. So that’s the good news. The headwinds—or the tailwind, whatever it turns out to be—is the election. I suspect that there will be new opportunities, but there will also be some losses because it will be very choppy.
EQ: There are concerns that as investors are being weaned off of stimulus euphoria and forced back to focusing on fundamentals, the market will suffer. Do you believe this to be true or has the market priced in the weakness?
Turner: I don’t see them being priced in. I wonder why that with all the stimulus being thrown at us, someone isn’t saying, “Wow, if we need this much QE 3, this economy must have more potholes than are evident.” I mean if we truly need all of this stimulus, it’s probably a sign that things must be pretty ugly out there. They’re throwing us a life vest and everybody is saying, “Oh, no. We’re fine.” So I’m not sure what the true answer is, but I do know the market rises on expectations. I’m hoping that our economy expands and things get a lot better, but at some point here we may get a bit of a jolt, especially with the fiscal cliff. Regardless of whether it does or does not come about, certainly the expectation of it and the news of it is going to start pushing and pulling the market here pretty soon. So I am truly getting pretty cautious right now.
EQ: What areas of the market are you watching closely this week?
I am still okay with the Select Sector SPDR Staples ETF (XLP) and that sector. Aside from that, in Toni’s Market Club right now, we are not taking on any sizeable new positions. I want to wait until after the first Presidental debate, which takes place on Wednesday night, and then tread softly until after Alcoa Aluminum (AA) kicks off earnings season the first of next week. We’ve had a great rally, and there’s no reason to give our profits back. So for now, we’ll keep them safe on the sidelines.