Tuesday, December 1 , 2015, 6:24 pm | Fair 59º

Craig Allen: This Earnings Season, NASDAQ Composite Is the Index to Watch

By Craig Allen, Noozhawk Business Columnist | @MPAMCraig |

The NASDAQ Composite Index ended last week with a 1.2 percent gain, but is still down 1.3 percent year-to-date, while the Standard & Poor’s 500 flirted with a new all-time high, and the Dow Jones Industrial Average closed at an all-time high during the week — its first new high for 2014.

With so many influential earnings reports from major technology companies driving market performance, the tech-heavy NASDAQ will continue to dictate market direction as we travel deeper into earnings season over the next few weeks.

Recent Index Performance

The Dow, which achieved a record high last week of 16,632, has had 24 of its 30 component companies report earnings so far, with a 3.3 percent average decline, and , according to FactSet, setting up the third year-over-year decline in earnings out of the past four quarters. Revenue looks to rise 0.4 percent for the first quarter, which would be the seventh straight quarter of less than 1 percent growth. However, during the past 12 months the Dow has increased more than 11 percent.

The S&P 500 has experienced somewhat better earnings performance than the Dow, with an average growth rate for first quarter earnings of 1.5 percent. This result is still far short of the 4.4 percent growth rate that was expected when the first quarter began, however.

Leading into earnings season, we saw a record number of companies reporting that they expected to miss analyst earnings expectations for the first quarter. In addition, first quarter GDP was reported this past week at just 0.1 percent annualized growth — far below the 1.1 percent estimate.

Searching for Leadership

Stepping back from the data, we would expect to see the NASDAQ outperforming the other two major indexes, since it is far more technology-weighted (tech stocks tend to outperform the broader market in times of economic expansion). Clearly this has not been the case; as stated above, the NASDAQ Composite index is down 1.3 percent year-to-date, while the Dow is only down 0.3 percent for the year, and the S&P 500 is up 1.8 percent so far this year. Clearly the NASDAQ has been underperforming the other indexes year-to-date.

The NASDAQ, which ended last week at 4,124, traded down to its 200-day moving average on April 15, before rebounding sharply. This dip to 3,946 resulted in the NASDAQ experiencing an intraday year-to-date loss of 5.5 percent. More important, the bounce directly off of the 200-day moving average indicates that the 3,946 level is highly significant for this index.

Clearly, earnings for the first quarter of 2014 have not been impressive so far, yet the Dow and S&P 500 have continued to rally since earnings season began. The NASDAQ appears to be a much more accurate reflection of earnings, and of the overall economy given its performance year-to-date.

Both the Dow and the S&P 500 dipped in mid-April, but unlike the NASDAQ, both indexes rebounded back to or very near new, all-time highs. This divergence between the NASDAQ and the other two major indexes, and the fact that the NASDAQ seems to more accurately reflect what is really happening in the markets and economy, makes the NASDAQ the index to watch going forward.

What to Look For

As earnings season progresses, we want to watch — in particular — earnings reports from major technology companies. Tesla Motors reports this week, and although technically it’s a car company, it trades like a tech stock and investors perceive it as such.

In addition, several other technology companies will report earnings this week, including Computer Sciences, Teradata, First Solar, Nvidia, Electronic Arts, Activision Blizzard and Symantec.

If any one of these, and especially Tesla, disappoints either with a poor showing for the first quarter or with a negative outlook for the remainder of 2014, we could see the NASDAQ Composite retest its 200-day moving average. A fall below the 3,950 level would certainly shake the confidence of many investors, and especially of those who rely on technical analysis for their trading cues.

If we look at where the market indexes are year-to-date — S&P 500 up 1.8 percent, Dow basically flat, and the NASDAQ Composite down 1.3 percent — it appears that the market is searching for direction. The Fed has been consistent with its removal of stimulus, announcing last week another $10 billion reduction in quantitative easing, which now stands at $45 billion per month from the peak of $85 billion. Tensions in Ukraine appear to have at least stabilized.

In the absence of a major shock to markets from a political event, we will need to see some kind of meaningful breakout or breakdown to send the stock market into a new phase — either a new growth phase that will see market indexes rally to new, all-time highs, or a new correction phase with indexes falling significantly more than 10 percent. A breakdown by the NASDAQ Composite through its 200-day moving average, in the absence of other market drivers, may be enough to send the market into that long-awaited correction phase.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump That Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.

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