Song Remains The Same — But Earnings Could Change The Tune

We open this week with stocks still weak and major indices such as SPDR S&P 500 (SPY) and Invesco Nasdaq Power Shares (QQQ) pressing back down to the year-to-date lows.

The forces at work are the same as they’ve been for the past six months — aggressive hiking of interest rates, a strong dollar, and global discord of both military and economic wars on multiple fronts. This week, we have plenty of Fed heads speaking and an important CPI report, both of which have the potential to move the market.

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It seems like the Fed is hellbent on raising rates regardless of real-time data to stem inflation, and is entrenched in its outlook. This has led to a record level of bearishness, but it has yet proved to be a contrary indicator.

That’s because while people may say they are bearish, they are not acting that way. To wit, money flows across popular stock and index ETFs remain mostly positive over the past few weeks.

People are always bandying about a variation on this image to assuage where we might be in the market cycle based on investor sentiment. My guess is we are between denial and anxiety.

But there’s something on the horizon that might change sentiment and reverse the trend lower — upcoming earnings reports.

Earnings season kicks off in earnest later this week with big banks such as JP Morgan (JPM), Wells Fargo (WFC), and Morgan Stanley (MS), which all report Friday morning. There are also some airlines, such as Delta (DAL), which will provide us with some insight into the proclivity for consumers to keep playing up for travel and other experiences.

My personal anecdote and push back — I just found out my son’s soccer club team was invited to the Disney (DIS) “Showcase Tournament” in Orlando.

-Fantastic, when is it?

-Oh, the week of December 26 to December 31.

-You mean Christmas week?

-Yeah.

-Sh&t.

Aside from the fact that Disney World is the last place on Earth I’d want to be during Christmas, the prices for airfare and hotels are outrageous. I’m trying to fight my divorced Dad guilt and negotiate some alternative, like just come to my house and we can kick the ball on the beach.

I digress. We need to refocus on the upcoming earnings season.

Earnings360 will begin next week, and I’ll have more info on how to join in the coming days

Earnings are always important, but this quarter seems especially crucial. The hope/belief/possibility that earnings will not crater may be the last thing preventing another leg lower in stocks. The two main items we need to focus on wil be margins and staffing issues.

On the former, we’re looking at the balance of input costs vs. pricing power. Costco (COST) recently reported it has no plans to lower prices because, even though headline prices of inputs from shipping to fuel to agriculture have dropped dramatically, the company is locked into contracts that won’t expire for another 8-12 months. This is a lag that has investors concerned inflation is entrenched, but the Fed will also have moved too far too quickly without giving time for prices and policy to work through the system.

On the latter, will we hear about more hiring freezes and layoffs. This, as absurd as it may seem, is what the Fed wants.

Basically, when earnings start rolling in, we’ll start to see whether this bear market is a natural reversion to the mean following an “everything bubble” or if the Fed is actually doing serious damage to the underlying economy.

So far, labor and jobs data remain relatively strong.

But earnings estimates are starting to drop precipitously.

This week will tell us whether we are at the end of the bear market or the beginning of a new leg lower.

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I’m keeping my ears pinned for a change in tune and starting to establish positions that will bear out my thesis…

…”Bear” being the operative word there.