Stock market bulls brace for major gut control as earnings, Fed and GDP loom



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A harsh reality for the euphoric stock market? The coming week could feature what comes closest to a calculation for bullish investors so far in 2021.

This is the busiest week of the fourth quarter earnings season, underscored by the highly anticipated results from heavy companies like AT&T T,
+ 0.35%,
Apple Inc. AAPL,
+ 1.61%,
Facebook FB,
+ 0.60%
and Tesla TSLA,
+ 0.20%.

In total, some 118 companies are expected to release quarterly results in the last week of trading in January, including 13 components of the top-notch Dow Jones Industrial Average DJIA,
-0.57%,
John Butters, senior analyst at FactSet Research, told MarketWatch.

And over 60% of that weekly attack will take place between January 27 and January 28.

The frenetic period could turn into a pivotal time for a market that may be looking for its next spark as the new administration in President Joe Biden’s administration rolls out its policy initiatives and plans to tackle the COVID-19 pandemic.

Optimism so far has been extremely high among equity investors, with sentiment data from Ned Davis Research at 74.4%, a level it has only reached 7.4% of the time since 1994 .

Likewise, the bullish-bearish spread is 19.3% compared to a median of 4% as of December 31, according to the survey by the American Association of Individual Investors.

Source: American Association of Individual Investors, Major Global Investors

Ned Davis Research says the buying mood has apparently crushed the appetite for bearish bets that stock prices will see a significant correction in the near term. “One thing investors do less is short selling,” wrote analysts Ed Clissold and Thanh Nguyen in a Jan. 19 research report.

According to NDR data, the short sell ratio, the number of stocks sold short divided by total issues traded, hit its lowest since 2011 in November.

You don’t have to search long to find evidence of the treacherous path short sellers face these days.

Concrete example, the GME stock of GameStop,
+ 51.08%
is on track for its best monthly gain in history, up 245%, as retail investment fanatics touted the action and urged users of finance-focused social platforms like Reddit to buy the shares to squeeze activist investor and short seller Andrew Left’s Citron Research.

The actions of the fanatical investor groups went beyond name calling and hacking attempts and included what Left described as “serious crimes such as harassment of underage childrenWrote MarketWatch’s sister publication, Barron’s.

For some, it is the market turmoil at its peak. Short sellers are shrinking back and fellow retail investors trying to demonstrate their newfound power.

Is this what the precursor of a bubble looks like? Are we in one? When will it appear, if so?

The Fed

These are all questions the Federal Reserve can be asked when it provides the backdrop for next week’s other major event: the latest monetary policy update.

Fed Chairman Jerome Powell has often been accused of both helping to prevent a calamity in financial markets when the coronavirus pandemic began in March of last year and of encouraging a take excessive risk.

The Federal Open Market Committee, which Powell heads, quickly cut interest rates to almost 0% and injected trillions of dollars in liquidity into the financial market that had been rocked by COVID-19.

But Fed policies have fostered some of the displayed risk-taking, some critics say. Bears also argue that endless money printing will have consequences for the US dollar, the economy, and eventually financial markets in the long run.

Biden is proposing an additional $ 1.9 trillion in federal government spending to help pull the U.S. economy out of recession as coronavirus cases and deaths hit a new high this month.

All of this may give added significance to the Fed rally next week.

“All eyes will be on President Powell at the FOMC meeting next week. We expect him to adopt a more optimistic, but cautious tone, ”Oxford Economics economists Lydia Boussour and Gregory Daco wrote in a research note Friday.

In recent speeches, Powell has already indicated that the Fed is unwilling to back down on monetary policy accommodations anytime soon, including raising interest rates from historic lows or reducing asset purchases, a source of support for financial markets.

The Fed meeting kicks off Tuesday, with Powell & Company delivering its policy update Wednesday at 2 p.m. EST, followed by a press conference hosted by the president.

American economic growth?

Thursday, a day after the Fed’s decision, market participants will await the official bulletin on the health of the US economy.

According to consensus estimates from U.S. economists surveyed by MarketWatch, the U.S. economy may have grown by around 4% on an annualized basis in the last three months of 2020, which would ordinarily be phenomenal, but follows an increase of 33 , 4% of the third quarter.

Nonetheless, if the GDP reading continues to show upward progress, it may underscore that the economy is moving in the right direction even as the coronavirus pandemic continues to rage.

After all that is said and done if the Dow, the S&P 500 SPX Index,
-0.30%
and the Nasdaq Composite COMP,
+ 0.09%
are still at a record distance, the bulls may find themselves even more emboldened.



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