Key Earnings This Week Could Provide Clue on Market's 'Mojo'

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), JP Morgan Chase ( JPM) and Yum! Brands ( YUM), 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.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage, according to ValuEngine.

VE Rating: A "1-Engine" rating is a strong Sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast One-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: the price at which to enter a good-'til-canceled limit order to buy on weakness. The letters mean: W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual.

Pivot: a level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: the price at which to enter a GTC limit order to sell on strength.

Earnings reports for Tuesday, Oct. 9, 2012:

Alcoa ($9.09) has a hold rating, according to ValuEngine, with an extremely elevated P/E ratio. Alcoa is below its 200-day simple moving average at $9.28. The stock set its 2012 high at $10.92 on Feb. 8 and set a 2012 low at $7.97 on July 25. The weekly chart is neutral with the 200-week SMA at $11.84. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Yum! Brands ($66.00) has a buy rating, according to ValuEngine, with an elevated P/E ratio and is just below its 200-day SMA at $66.29. The stock set its 2012 high at $74.44 on April 20 and set a second-half 2012 low at $61.05 on July 12. The weekly chart profile is neutral with the 200-week SMA at $47.24. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Earnings reports for Wednesday, Oct. 10, 2012:

Costco Wholesale ( COST) ($101.79) has a buy rating, according to ValuEngine, with an elevated P/E ratio. The stock is above its 200-day simple moving average at $90.06. Costco set a multiyear high at $103.51 on Sept. 21. The weekly chart profile is positive but overbought with the 200-week SMA at $68.60. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Earnings reports for Thursday, Oct. 11, 2012:

JB Hunt Transportation ( JBHT) ($55.20) has a buy rating, according to ValuEngine, with an elevated P/E ratio. The stock is above its 200-day SMA at $53.49. JB Hunt set a multiyear high at $61.18 on June 19 and a second-half 2012 low at $50.56 on Sept. 20. The weekly chart is positive with the 200-week SMA at $39.11. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Bank of the Ozarks ( OZRK) ($34.47) has a buy rating, according to ValuEngine, with a so-so P/E ratio and is well above its 200-day SMA at $30.87. The stock set a multiyear high at $34.98 on Sept. 14. This community bank has a positive weekly chart with the 200-week SMA at $20.46. Investors and traders should reduce long positions on strength to my weekly pivot at $35.04 and then employ a "buy and trade" strategy between the value level and risky level.

Bank of the Ozarks is a $3.75 billion community bank that the Federal Deposit Insurance Corp. has used to assume assets of failed smaller banks. OZRK has modest overexposures to commercial real estate loans, but its loan commitment pipeline is well-managed.

Earnings reports for Friday, Oct. 12, 2012:

JP Morgan Chase ($41.71) has a buy rating, according to ValuEngine, with a favorable P/E ratio and is above its 200-day SMA at $38.24. The stock set its 2012 high at $46.49 on March 27 and a 2012 low at $30.83 on June 4 as investors worried about the depth of the "London Whale" trading losses. Today that worry appears to be over as the stock is above the price gap of down from $40.74 on May 10 to $37.99 on May 11 when the trading loss was revealed. Will JPM provide an update on this trading loss? The weekly chart is positive but overbought with the 200-week SMA at $38.25. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Wells Fargo ( WFC) ($35.84) has a buy rating according to ValuEngine with a reasonable P/E ratio and is above its 200-day SMA at $32.49. Wells set a multiyear high at $36.60 on Sept. 14. The stock has a neutral weekly chart profile as momentum is declining. The 200-week SMA is $27.80. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

JP Morgan and Wells Fargo are two of the four "too-big-to-fail" money center banks with plenty of accounting flexibility to manage earnings expectations. Will revenues continue to be raised by write-offs of bad loans and reduced loan loss provisions? Will revenue be reduced because of lower Treasury yields?

Beware that bank stocks are up against multiyear highs but below their September QE3 reaction highs. Will there be a positive catalyst in the banking industry given the slowing economy here and abroad?

At the time of publication, Suttmeier had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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