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The “Heat Map”

August 12, 2014 | Weekly Commentary

Re-posted August 20, 2014

Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: We have graded this factor B (above average) based upon the increase in retail sales as reported in recent economic reports.

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.

BUSINESS PROFITABILITY: We CONTINUE to rate this factor B- (slightly above average).The second-quarter earnings season turned out to be a pleasant surprise. According to Zacks Investment Research, 453 companies in the S&P 500 have reported, with earnings up 8.7%, on average, from the year-earlier quarter’s and revenue ahead 4.6%. Two-thirds of the companies beat profit expectations, and an above-average 61.4% topped revenue estimates. This is much better than predicted, and the best showing since 2011’s fourth quarter.

The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have identified one potential international crisis hot spot:

Iraq and the “powder keg” in the Middle East including Gaza. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week even in light of the inability to find a diplomatic solution to the Israeli/Gaza conflict. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: There is no change from the last report.

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