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Earnings season accelerates during the next three days as over 90 S & P 500 companies are scheduled to post results.  For the period, profits are expected to fall about 5%, the fifth consecutive decline and the longest stretch since 2009.

Many are writing the averages are approaching 2000 bubble valuations.   I share this view about the indices but not for the typical stock.  As discussed many times, the averages have been co-opted by high frequency trading and passive ETFs where the underlying premise is based upon capitalization, hence inferring the big will continue to get bigger and the small smaller.

The typical stock has grossly underperformed since 2011 with some studies suggesting this underperformance commenced in 2006.

From February lows to the end of June a transition appeared to be at hand where the typical stock outperformed as compared to mega capitalized momentum growth. Since Brexit, it has been the return of momentum growth amplified by the utilities and telcos.

The reason…central bank stimulus and low interest rates forever.   I rhetorically ask what will be results if large cap growth misses on the dumbed down earnings projections and interest rates move higher because of stronger than expected inflationary pressures, the result of extremely low housing inventories amplified by rising PPI pressures?

Some have opined markets require a capitulation.  Could I suggest mega capitalized momentum growth and utilities capitulated on the upside over the last three weeks?  Could I then suggest there will be a continued rotation in the lesser owned securities that may benefit from higher interest rates, the result of greater economic activity as was the case in 2003-05?

All must remember it is never different.  There are just different people.

There is little I can write about yesterday’s market action.  Treasuries fell nominally on economic optimism, the dollar rose and crude slipped.

Last night the foreign markets were down.  London was down 0.21%, Paris down 0.84% and Frankfurt down 1.05%.  China was up 0.32%, Japan up 1.37%and Hang Sang down 0.60%.

The Dow should open nominally lower ahead of a busy earnings day, releases that include Microsoft, Goldman and various other large cap names.  Netflix missed and the stock is down over 14% premarket. The 10-year is up 8/32 to yield 1.55%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.