Stock-to-gold ratio at a decision point
Can earnings season get the inflation-adjusted S&P 500 moving?
Removing the inflationary effects of the Fed's dollar printing, stocks are now sitting at the lows reached after the swoon in early September. By looking at the relative performance of the S&P 500 to gold futures, investors are nearing something of a decision point.
One of two things can happen from here. Gold, which blasted to a new high of $1,044 on Wednesday, could continue to outpace stocks. Or we could see gold cool off and stocks start posting some real, inflation-adjusted gains.
My guess is the September lows for the stock-to-gold ratio will serve as critical support for another move higher. Why? Well the two big movements in the gold-adjusted S&P 500 occurred between April and May (first-quarter earnings season) and July and August (second-quarter earnings).
Analyst estimates for the third quarter as they stand now don't adequately account for the healing that has occurred in the global economy over the last three months. Thomson Reuters puts the current Q3 earnings growth rate for the S&P 500 at -24.8%. This is slightly worse than the -20% estimated earnings growth rate that prevailed back in July and August and the -17.2% analysts expected back in April -- so expectations have come down quite a bit. This is a good thing since lowered expectations are easier to beat.
Take a look at the chart above. During both the Q1 and Q2 earnings seasons, positive surprises during the first two weeks forced analysts to positively revise their earnings estimates. Credit Suisse analysts expect a similar trend to develop over the next few weeks. With Aluminum giant Alcoa (AA) kicking things off Wednesday night with a surprise return to profitability, earnings upgrades should provide the impetus needed to get the adjusted S&P 500 moving again.
My portfolio at Wall Street Survivor is now up 25.3% for the month versus a 1.2% rise in the S&P 500. My largest gainer is the DB Double Long Base Metal ETF (BDD), which is up 16.4% since I added it on Monday.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The idea of US crude being a shelter from turmoil abroad may not be as far fetched as it seems.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.