What I am watching during Q4 earnings season

Mid-week market update: As we enter Q4 earnings season, the macro backdrop looks grim. The Economic Surprise Index, which measures whether economic releases are beating or missing expectations, is weakening.



Weak fundamentals

From a bottom-up perspective, FactSet reported that the market entered Q4 earnings season with a trend of falling net margins.



Moreover, forward EPS estimates are declining and both sales and EPS beat rates are subpar.



The Transcript, which monitors earnings calls, summarized the mood as cautious and expecting a mild recession:
There is a lot of hope that the macroeconomic outlook is improving, but at least according to Procter and Gamble’s CEO “that’s really not the reality though.” There’s still a lot of caution among management teams and the base case appears to be that we will have a mild recession. Several Fed members spoke last week and indicated that even though they are pleased that goods inflation is coming down, they are closely watching inflation in service industries, which continues to run above trend. They seem to be firmly committed to a restrictive monetary policy.



The technical outlook

To be sure, the S&P 500 did stage a minor rally through a closely watched resistance level that was defined by a falling trend line. However, the upside breakout was not confirmed as other indices stalled at resistance.



In addition, the S&P 500 exhibited numerous negative divergences as it neared resistance, which cpi;d be a sign of bullish exhaustion.



While other technical analysts highlighted the bullish implications of recent breadth thrust buys signals, I said to watch the stock level price momentum factor (stocks that outperform continue to outperform) for confirmations of underlying market strength. It’s not unusual to see a bounce led by low-quality or highly shorted names, but the price momentum baton needs to be passed to the broader market. So far, stock level price momentum has been weak.



Tactically, the market is still overbought and needs a pullback or period of consolidation until the main event next week, namely the FOMC decision on Wednesday. My inner trader will remain short until then, or until the NYSE McClellan Oscillator turns negative.



Here are the usual disclaimers about my trading positions:

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXU


4 thoughts on “What I am watching during Q4 earnings season

  1. Bank of Canada becomes the first CB to pause rate hikes, to assess the lagging cumulative effects of all rate hikes last year. Despite Fed’s tough talk, the game has changed.

    1. It’s no longer about the [pace of/pause in] rate hikes. It’s about the odds of a recession.

  2. Looks like Cam has covered his short position.

    I’m now 4-and-a-half months into my ‘zero-market-risk’ strategy – of course, no such thing as zero risk. Still holding one-year 4% T-bills maturing in September , but managed to transition out of a number of 4% brokered CDs into one-year 4.77% T bills that mature in December. I’ve always said that if I’m able to find an asset class that offers 5% risk-free (which is what the company pension plan offers) I would leave market risk behind. So I’m pretty happy with the current portfolio.

    I can foresee being a little unhappy if the market returns +15% this year – but that’s the tradeoff between risk and reward. A significant benefit has been the amount of time/ mental energy now available for ‘other things.’ It’s amazing how much time we can spend analyzing market moves when we’re in the game.

    1. You are running a balanced portfolio that reduces both beta and alpha. Great positioning. I agree with the 5% scenario.

Comments are closed.