Morning Comment: Market Overbought as Earnings Season Begins

Recent late-day rallies are bullish

The stock market advanced further into record territory on Friday…as the Fed’s dovishness continues to fuel the rally. Friday’s gains came on meager volume (less than 2.4bn shares in the composite volume). It also came on mediocre breadth…particularly for the Nasdaq, whose breadth was just 1.2 to 1 positive. Therefore, the quality of Friday’s advance was not particularly good. However, the stock market did see a nice late day pop…something we saw on EVERY day of last week. In fact, it’s something we’ve seen on 10 out of the previous 11 trading days! The last hour of trading is always important…and when you get a trend like this over an extended period of time, it’s usually a positive development.

However, the stock market is overbought near-term

Of course, after an almost 10% rally over just six weeks (+12% for the Nasdaq), the market is becoming pretty overbought on a near-term basis. Therefore, we could/should be getting ripe for a bit of a pull-back that works-off this condition. In other words, if the market begins to pull-back this week, it won’t necessarily mean that we’re going to see another situation where the S&P 500 “fails” to breakout significantly above its old record highs. In fact, it would be healthy if the market digested its recent impressive gains before it tries to finally succeed in breaking above its old highs in a meaningful way (after failing to do that three times over the past 18 months). So if we see some weakness in the stock market this week, it won’t be a major warning signal.

Will "guidance" signal an earnings recession?

The focus will now turn earnings…as almost half of the S&P 500 will report over the next two weeks. They will beat expectations…like they ALWAYS do…but the focus will be on the guidance. As we have been saying all year, investors have been depending on very strong Q4 numbers to give the full-year earnings a gain of any substance, so the guidance we get this earnings season is going to be critical. If the guidance for Q3 & Q4 leads full-year estimates to come down in any substantial way, it will take them towards zero…as the full-year forecasts stand at only 2.7% right now!

Earnings recessions DO create headwinds!

A lot of pundits like to point out that the last earnings recession in 2015 did not knock-down the stock market, BUT it DID keep the market from rallying that year. (2015 was a flat year for the stock market.) This year, the stock market is up more than 20% already!!! Yes, this rally started from a very low level after the deep correction we saw in Q4…so the 2019 rally is not as divorced as it might seem from the paltry earnings growth we’ve experienced this year. However, “poor guidance” during this upcoming earnings season should still create some headwinds for stocks……In other words, there’s no guarantee that this fourth attempt in 18 months to break significantly above the old highs will succeed. Therefore, investors will need to continue to be nimble over the coming days and weeks.

TLT Treasury ETF testing first support level

Moving to the bond market, we’ve seen a bit of a decline (in price) in the Treasury market for much of this month. The pop in interest rates that this has created is not a major development…given the large decline in rates we experienced in May & June. I will highlight, however, that the TLT (Treasury ETF…which measures price, not yield) is testing its 50 DMA. This has provided reliable support for the TLT this year, so although a break above that line would not be a major development, it would raise some questions about the inevitability of lower rates…at least over the near-term.

Watch the 2.2% level on the yield of the U.S. 10yr note

That said, the more important level I’ll be watching deals with the yield on the 10yr note. The trend-line from its November highs of last year comes-in near the 2.2% level. Therefore, any break above that level would be a more compelling development……No, I'm NOT calling for a big change in the trend for long-term interest rates going forward. However, I always like to point out potential "disruptors" to the market place. Given how almost everybody is looking for interest rates to stay low this year…a sizeable rise in rates would certainly catch a lot of people offsides.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC


275 Grove St. Suite 2-400

Newton, MA 02466


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Posted to The Maley Report on Jul 15, 2019 — 9:07 AM
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