Should You Follow the Stock Charts?

We read about all the worries.

There’s trouble in Washington: there’s the Mueller investigation and talk of a Trump impeachment.

There’s trade wars. There’s the upward moves in interest rates.

If it’s not that, it’s the direction of the US dollar which has others worried.

There’re also hot spots around the globe that have some analysts concerned.

There’s always something to worry about.

But here’s something I want to remind you of.

Something basic, that often gets lost in all the market comment.

And it’s this…

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Beating Earnings Estimates

If a stock is growing earnings, its share price will typically rise.

Amongst all the negative talk, we tend to forget this.

That might be why US stocks are surprising to the upside this reporting season.

And topping earnings estimates.

US firms are set to post an earnings season, with the greatest number of ‘beats’ in a decade.

That is ‘beating’ the estimates set down by the analysts.

What it suggests to me is this.

If you focus on all the worries it can blindside you.

You could stop seeing the opportunities in the market.

And it might explain why the analysts have got it so wrong.

If you want to know what’s really going on, read the economy through the charts.

There are so many stocks that are moving on US markets right now.

But I’m not going to bombard you with charts.

Instead, below is an ETF which might make clear what I’m trying to say. It throws a blanket over a 100 or so stocks, all at once.

This ETF tracks the smallest 800 stocks of the Russell 1000 index. 

But these are not small firms by any means.

It’s called the Invesco Russell MidCap Pure Growth ETF [NYSEARCA:PXMG].

Let’s bring it up. Here’s the weekly chart…

Graph of PXMG

Source: Optuma

[Click to open in a new window]

All the market analysts get worked up about the geopolitical risks of the day. But see how markets climb a wall of worries. This is typical of what markets do.

And none of that really matters to US companies that don’t do business in Turkey, or Italy, or wherever else hot spots might arise.

The trend on this ETF is up. And up strongly.

Why?

Because firms in this ETF are growing earnings. That’s what drives gains on Wall Street.

Things are really strong for US companies right now, if this earnings season is any guide.

But you already knew this reporting season would be strong, months ago!

And here’s how you knew…

Remember the February panic in the markets? Some of the experts put it down to wage pressure concerns.

Perhaps at the time, stocks were just fully priced.

Whatever the reason, the big move down brought out all the bears. And out came all the sweeping statements about a market collapse.

While all the talk at the time was of a market collapse, I was writing to the contrary. We’d just witnessed a huge two-year bull move. Stocks were fully priced and ripe for a sell-off. It was normal market behaviour.

That’s all on record, if you seek out my February post .

I also wrote that this bull market still had steam to run.

It was a reasonable call in hindsight.

Now to be honest, back in February I wasn’t 100% certain in the moment. Trading markets is not so easy in real time. But I put it on the line nonetheless.

But note how after the February panic, the ETF breaks higher in March, then in April the ETF brings in a higher low.

That’s telling you a few things.

If you were unsure about where the market was headed in February, you knew a lot more soon after.

By March–April, markets were never going to collapse.

And I’ll tell you why.

And this I really want you to hear me on.

Because if you can get to grips with this, you might begin to see the market open up with new opportunities.

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Nothing Surprises the Market

The market already knows those good US earnings results. Months in advance.

As I see it, that’s why the ETF is making a higher low, a few months out from the start of the reporting season.

In March perhaps, and certainly by April, the market was suggesting that good earnings were coming.

The analysts may have been surprised by the good earnings this season.

But can you see how nothing surprises the market?

Here’s one more thing you can take away from the chart.

I’ve also noted the market panic back in early 2016.

Markets tumbled then on China concerns. Again, that brought out all the bears and the sweeping statements.

The Royal Bank of Scotland came out and warned of an imminent crisis. They saw red lights flashing similar to 2008.

While markets were tumbling over the globe, I was able to call the Royal Bank of Scotland ‘wrong’.

In real time. In the heat of the moment. That’s been on record  for Money Morning Trader subscribers since 15 January 2016.

The bank at the time advised clients to sell everything and brace for a ‘cataclysmic year’.

From the perspective of the market, the bank made the wrong call.

Investors that took that advice would’ve sold at the bottom.

And missed out on one of the strongest bull moves in history.

Soon after the low in February 2016, I was convinced markets were going higher — a lot higher.

I came to that conclusion by looking at the chart.

Your take away?

Stop reading opinions. Mine or otherwise.

Learn to read a chart.

It’s the only way you will get close to the truth.

Charts give you the clues. If you want to use those clues to learn how you could potentially profit from market movements, go here to find out more.

Terence Duffy,
Chartist, Phil Anderson’s Time Trader


Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.


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