Here Comes Earnings Season

The stage is set for an exciting earnings season. Guidance is one thing, but this is where the rubber to meet the road. Can earnings actually grow from here? Or have we seen peak earnings growth for this economic cycle?

It may not matter… yet. The Fed has all but assured markets a rate cut is coming. So there’s little incentive to run for the fixed income markets. There really aren’t a lot of options for investors to find yield — or any returns for that matter — outside of select real estate markets or equities markets. So a multiple-expansion rally is not out of the question at this point.

The funny thing is, while the fundamental story driving this market higher has not changed, the technical picture has become a mixed bag for the S&P 500. The rather orderly expansion continues to behave calmly as the day-over-day pricing break new highs. In fact, five of the last six trading weeks have finished positive.

But there’s more to the story than just printing higher highs. The SPX is above it’s 50, 100, and 200-day moving averages. And it’s now more than 1.5 standard deviations above its 21-day trading average. By those figures, this market is over-bought.

So which is it? Orderly or over-bought? Perhaps both. The thing is, despite being over-bought, there does not seem to be significant pressure for a price correction. Now that 3000 has been breached, the index will need to test this level to see if it will maintain support. Otherwise, a pull-back toward the 2940/50 level would be fairly typical based on the pricing pattern unfolding.

The upside, while possibly breaking out, appears to be around the 3035 level for the week. If this level is breached, a run for 3050 is certainly possible. But given the over-bought nature of the market, it would take some pretty good earnings news to push things that quickly while we’re already at all-time highs.

Should a downdraft materialize, look for the 3000 level to be the first test. A breach of this level is not exactly a problem. It could just mean a test of the 50-day moving average, or somewhere down near 2900 is even possible. This does not negate the current up-trend. It would be a fairly orderly and typical round of profit taking to see this kind of price move. Should the 100-day moving average be pierced then it may be worth taking a closer look at pricing.

For the week, look for the bias to be positive, with some volatility increasing as earnings season gets under way. As long as expectations are met and guidance is reasonable, the 3100 level is still within sight in the next few weeks. If sentiment turns, we will re-evaluate at that time.

Meanwhile, the BigFoot database continues to be around 78% long. This should remain stable as long as volatility remains low.

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