Strong earnings and data may convince traders to buy dips

Good morning,

• Geopolitical concerns continue to weigh on investor sentiment;

• Strong earnings and data may convince traders to buy dips;

• Russell 2000 failing to confirm Dow and S&P, but this is not necessarily a red flag;

• Gold up 0.4% on the day on slight risk averse market stance.

Lingering fears over the conflict in eastern Ukraine and Israel’s ground offensive in the Gaza strip are further weighing on investor sentiment on Monday, with European indices getting the week off to a negative start and those in the US seen doing the same. Ahead of the opening bell, the S&P is seen 4 points lower, the Dow 30 points lower and the Nasdaq 4 points lower.

It’s worth noting here that while these events are undoubtedly having an impact on market sentiment, Friday showed us that investors are willing to look past them if an opportunity to buy the dips presents itself. That could come from good economic data, dovish comments from a central banker or strong earnings.

This could be viewed by many as complacency on behalf of investors but that may not necessarily be the case. While the rising death toll in Gaza is a massive concern, from a purely markets perspective, we’re seeing no signs of this spreading beyond the region at this stage which would explain why we’re not seeing it weigh too heavily on the markets. Meanwhile, in eastern Ukraine, there is much more potential for a greater escalation that could be damaging to many countries. However, as long as leaders continue to worry about the economic impact on their own countries of more severe sanctions on Russia, the odds of a significant escalation looks fairly low.

This leaves us with a situation as we saw at the end of last week in which we see a brief flight to safety immediately following the event, followed by more buying as investors look to take advantage of the cheaper stocks. I expect this to continue in the coming weeks, especially if corporate earnings season goes as well as is expected, giving investors plenty of reason to buy any dips and seek a little more risk. This is likely to be a big driver today, despite only a dozen S&P 500 companies reporting second quarter earnings, with little appearing on the economic calendar to give the markets some direction.

One concern among many investors right now is that the Russell 2000, an index consisting of smaller stocks, is failing to confirm the moves in the Dow and S&P 500. In times of uncertainty, investors tend to favour save haven assets but at other times, like now, when they are reluctant to reduce their stock holding, they instead opt for blue chip stocks as a way to reduce their risk. This can be seen as a sign that the market is not doing as well as the record highs would suggest and acts as a red flag to many that a bigger correction is just around the corner. That said, losses of more than 10%, which we’ve already seen once in the Russell 2000 this year and aren’t far from seeing again, is extremely common in this index, which may suggest that people are reading too much into these moves.

In the commodity space, we’re seeing this small amount of risk aversion favouring Gold this morning, which is currently trading at $1,314.40, up 0.4% on the day. While I find it difficult to be bullish on the yellow metal against a backdrop of an increasingly hawkish Fed and Bank of England, and low inflation, it continues to be supported by the high levels of geopolitical risk and therefore some short term upside is still a strong possibility. July’s highs of $1,345 remain the next hurdle, while from a technical standpoint, $1,368 looks quite a significant barrier, with the descending trend line from August 2013 highs potentially providing significant resistance.