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Did You Panic Sell at the Bottom?

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This ALWAYS happens.

People without a plan catch a whiff of some new cycle whipped up fear and decide that “this is it – my gut (or a friend “in the know”) is telling me that it’s time to get out.”  Sure we had a pullback as the S&P 500 saw a peak to trough move of roughly 7%, but these things happen (as I wrote about last week).  However, last week the U.S. stock indexes surged, snapping a four-week string of losses as third-quarter earnings reports were largely better than expected. The S&P 500 jumped more than 4% to record its biggest weekly gain since January 2013.

What’s behind the move last week?

I saw five things last week that I think contributed to the move:

First: pretty good third quarter earnings.  There were a decent number of companies beating earnings.  Not bad. I didn’t see a bunch of revenue or earnings warnings last week, either.

We follow Bespoke Investment Group for earnings research.  So far, about 600 companies have reported their earnings and revenue for the third quarter (3Q) of 2014. Here’s where we stand:

The percentage of companies beating their revenue estimatesfor the 3Q currently sits at 58.4%. This number is currently below the average of 60% we’ve seen since 2001 and also below the 60.7% that finished up the 2Q of 2014.  Of course, the earnings reports are not close to being complete and it is above the 56% final reading we saw in the 1Q.  Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings ping pong but the trend has been steady UP for revenues.

But I thought you said 3Q earnings were pretty good so far?”

AHHH! Well, the percentage of companies beating their earnings estimates stands at 66%!  This is WELL above the 58.6% final reading from the 2Q of 2014 and SUPER DUPER WELL above the 56.7% reading from the 1Q.  Small-cap stocks have not really started reporting in earnest so this may come down some, but for right now, 66% is super-duper.

…and in fancy finance language, super-duper is better than super.   Just so you have a reference.

Second: The Fed may wait longer to hike the Fed Funds Rate.  No one is expecting rates to go up rapidly or unexpectedly, but a delay in the first rate hike to later in 2015 is good for stocks.

Third: The weirdness of oil and its recent stabilization.  While cheaper oil helps out the consumer and lots of producers, it’s is also somewhat of a proxy on global sentiment.  Declining prices in this commodity signal that the world thinks there is a slowdown.  Continued declines means the world thinks there is more slowdown to come.  So stabilization is good from that perspective.

Fourth: Ebola fears seem to have subsided.  A doctor tested positive for the virus on Thursday with the news hitting by evening.  It turns out he lives in NYC, spent some time prior to being diagnosed walking the High Line, taking an Uber, going running and going bowling….

The DJIA was up 128 points the next day.

Fifth: We are heading into a traditionally strong part of the year for equities on the heels of a 7% sell-off.

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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.

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