The “Heat Map”

Posted on August 25, 2014 by The Weekly Commentary

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: I 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: I 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: I CONTINUE to rate this factor B- (slightly above average). Earnings reports have continued to impress investors, with earnings per share running 10.2% above last year’s results, according to S&P Capital IQ. Nearly 59% of companies in the S&P 500 had beaten Wall Street earnings estimates and 60.7% had exceeded revenue estimates, according to Bespoke Investment Group.

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, I rate this Middle East powder keg situation as a 3 at this time. This is unchanged from last week, but still elevated, due to: (1)the inability to find a diplomatic solution to the Israeli/Gaza conflict, (2) the report of Iran shooting down an Israeli drone headed for Iran’s Natanz nuclear enrichment site, and (3) the report of Ukrainian troops fighting a convoy of entering Ukraine from Russia. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: There is no change from the last report.

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