The market rallied earlier in the week, which was a positive sign. It tells us that buyers are looking to find great deals and investors aren’t too concerned about another big decline.
It is also a sign that the bounce occurred at a crucial support level on S&P 500 close to 3,590. Solid support means that prices are not going to crash because there are enough buyers.
As we’ve been saying for several weeks, third quarter earnings should be stronger than expected. Consumers are spending as usual, so the floor below stock prices should continue to be strong. That is how earnings season looks so far.
Even though the outlook is positive, it’s important to temper our expectations. It’s rare for a bullish rally that begins with major reversals like Thursday.
This indicates that investors are insecure and market prices tend to reflect this. The economy’s negatives (inflation and rising interest rates) will continue to be a concern.
According to our opinion, the positives as well as the negatives are balanced enough for the market to remain stable and will prevent any major bullish breakouts.
For now, we are in a gray area.
With earnings season now in full swing, there are some things we can look forward too…
Earnings
While it’s too early to draw any conclusions from earnings season, bank reports look quite good. The banks actually did very well, even if you include the non-cash loss banks put aside to cover loan defaults next spring (if unemployment begins to rise), than this is in line with expectations.
This report by Bank of America Corp. (BAC), is a good example of our intent.
It is now the highest net interest income in 10 years. According to BAC management the consumer spending on credit card increased 13%. This is a good thing because most of it is spent on travel and entertainment, not necessities as many analysts feared. The bank also reported its second lowest loan delinquency rates.
Although inflation can affect consumer spending, the BAC Report confirms our view that it hasn’t influenced consumers sufficiently to be a significant economic threat. The Fed will continue raising interest rates by selling bonds, increasing its overnight target rate and even raising consumer demand as long the demand remains high.
We think that there is little chance of the support system being reopened unless we see more decline in consumer spending or corporate margins.
Upcoming Catalysts
The market will be influenced by two major factors in the coming weeks. They will either stay within their channel (which is what our expectation) or break out to the upside.
Tech Earnings
Tech companies are beginning to start trickling in earnings this week as the earnings season ramps up.
These reports will have a significant impact on investor sentiment, either good or bad, before the Microsoft Corp. (MSFT), Apple Inc. (AAPL), Alphabet Inc. (GOOGL), Amazon.com Inc. (AMZN), reports next week.
We expect tech companies to sandbag during their earnings calls (lower guidance to make next quarter easier to beat). It would be reasonable for companies to point out the weak dollar and falling international demand as the reasons for the slow growth rates. However, it is up to investors to decide if they believe these trends will continue.
The Fed
The Federal Reserve Open Market Committee, (FOMC), will almost certainly increase rates on Nov. 2.
The current bond market pricing assumes that traders have already priced in a possibility for a hike of 0.75% at 95%.
However, it is not yet known what the Fed Chairman or other Fed governors will think about the hike.
Recently, members of the FOMC stated that there would be some debate over whether to keep increasing rates in 2023 at an identical pace as in 2022. But that was before the CPI report which far exceeded expectations.
Analysts and traders are concerned that Fed members might adopt a more hawkish tone without much “debate” which would be detrimental to stocks. Although we believe that the Fed will continue to be consistent at the moment, this is likely to become the most significant wildcard.
Bottom Line
Our view is that there are both positives and negatives on the market.
Traders are used to having a clear and concise answer. You can feel frustrated by market swings that are out of control.
We will continue to use the strategies that have performed well in a channeling marketplace. Selling calls at resistance levels, buying them back, or writing short put on the lows. As we receive more data from the Fed (Nov.2) and earnings (Nov.4), we will let you be aware if it affects our outlook or strategies in any way.
We are confident that our strategy will work in any market. This year, we have an impressive 95.94% success rate.
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