Low Liquidity, 2Q Earnings and Market Breadth

July 27, 2015

Low Liquidity, 2Q Earnings and Market Breadth Photo

Given that we are in the middle of summer vacation season, I figured a blog post about market liquidity seemed appropriate. In past blog posts, I have written about the low liquidity in the market and the relatively choppy trading in the fixed income markets. The smaller balance sheets in the post Dodd-Frank era, the low level of interest rates and the Fed's balance sheet expansion have created an environment where market moves have been large in price terms.

With a Fed rate increase most likely by year-end 2015, investors should be cautious of large price moves in the fixed income market. The added volatility should create good trading opportunities utilizing overbought and oversold technical analysis techniques.

The equity market continues to digest second quarter earnings releases. Overall, earnings are meeting lowered expectations, but a few companies have stolen the headlines. Google and Amazon have seen significant increases on better-than-expected revenue and profits. Biogen's stock priced dropped significantly, despite better-than-expected revenue and profits due to reduced expectations for a key drug in its pipeline.

These stocks are important for the overall market because the breadth of the equity market (the number of stocks increasing in price relative to the number of stocks decreasing) has continued to deteriorate in 2015. This means that fewer and fewer companies are driving market performance overall. One of the risks for the stocks of these individual companies in this environment is that prices can move very significantly on good and bad news. For the overall market, the declining market breadth is an indicator that should cause caution for future market returns.

Check out our second quarter overviews and our revised forecasts for year-end 2015 and 2016 on the Penn Mutual Asset Management website.

Tags: Monday Morning O'Malley | Market volatility | 2015 Outlook | Earnings | Market liquidity | Market breadth

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