NEW YORK ( TheStreet) -- This week's earnings reports should provide the market with an excellent read on economic strength.
The seven companies I am profiling today, including Alcoa (AA - Get Report), JP Morgan Chase (JPM - Get Report) and Yum! Brands (YUM - Get Report), all report earnings this week. They will provide reads on demand for aluminum, fast food, discount-store products, trucking and banking.
How the market reacts to earnings is extremely important as the Dow Jones Industrial Average and S&P 500 try to rally toward their October 2007 highs at 14,198.10 and 1576.06, respectively.
Fundamentally, there's a 50/50 split between the number of undervalued and overvalued stocks with 13 of 16 sectors overvalued, six by double-digit percentages.This means that market momentum, or "mojo," is the driving force higher as QE hype continues. At www.ValuEngine.com, we show the basic industries sector 3.0% overvalued, the retail-wholesale sector 14.4% overvalued, the transportation sector 1.7% undervalued and the finance sector 13.5% overvalued. If earnings disappoint in this environment, those individual stocks could catch QE fatigue, making it tougher for additional strength toward those October 2007 highs. Both the Dow Jones Industrial Average and S&P 500 ended last week with positive but overbought weekly chart profiles, and only the Dow set a new post-QE3 high on Friday. The other major averages including the S&P remain below their QE3 reaction highs set on Sept. 14 or Sept. 21. This divergence is a sign that individual stocks could have difficulty taking out their 2012 highs following their earnings reports. Most companies will have the accounting flexibility to match or beat EPS estimates, but you should expect a higher-than-normal number of misses on the revenue line. In addition, forward guidance should be subdued given the uncertainties of global economic growth and the "fiscal cliff" that looms as 2013 begins.