Traders have been buying everything this month, and that could continue to push prices higher in stocks while fueling a turnaround in bonds and gold.
Headlines Hide the Good News in Earnings
Despite some headline grabbing disappointments, earnings season is actually off to a good start. About one-fifth of the companies in the S&P 500 index have reported earnings, and 66.4% have beaten estimates. Over the past four quarters, 64.6% of companies have beaten estimates on average. We are still weeks away from knowing what the number will ultimately be for this quarter, but it is a promising start.
Headlines have been focused on the companies that have come in below expectations. That list includes Intel Corporation (NASDAQ:INTC), Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG). Intel Corporation (NASDAQ:INTC) fell 3.6% for the week, Microsoft Corporation (NASDAQ:MSFT) was down 12%, and Google Inc (NASDAQ:GOOG) was off 2.9%. These losses weighed down PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), which lost 0.9% last week.
Other than tech stocks, the broad market did well as SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained 1% last week. Investors have been buying about $1 billion worth of SPDR S&P 500 ETF Trust (NYSEARCA:SPY) a day so far this month. They have actually been buying almost all equity ETFs, with money flowing into funds four times faster than average.
The effect of this buying can be seen in the Dow Theory buy signal that was confirmed last week.
Dow Theory identifies the direction of the major trend in the stock market. In the late 1800s, Charles Dow developed the Dow Jones Industrial Average and the Dow Jones Transportation Average to track trends in the economy.
Dow understood that the economy grows when manufacturers are producing as much as possible. Economic growth translates to profits for the companies, and this can be seen in the performance of their stocks.
Getting manufactured goods to market requires that the transportation industry also be growing, and that would drive the stocks of the transport companies higher. When both the industrial and transportation indexes are moving in the same direction, a confirmed trend is in place and traders can become more aggressive.
Both the industrial average and the transportation average are at new highs, and that is the definition of a bull market according to Dow Theory.