/ October 12 / Weekly Preview
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Monday:
N/A
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Tuesday:
Existing Home Sales (3.96M exp.)
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Wednesday:
Core Inflation Rate YoY (2.5% exp.)
Inflation Rate YoY (3.7% exp.)
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Thursday:
Retail Sales MoM (0.3% exp.)
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Friday:
N/A
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Monday:
N/A
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Tuesday:
J P Morgan Chase & Co
Johnson & Johnson
UnitedHealth Group Incorporated
Wells Fargo & Company
Citigroup Inc.
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Wednesday:
ASML Holding N.V.
Bank of America Corporation
Morgan Stanley
BlackRock, Inc.
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Thursday:
Taiwan Semiconductor Manufacturing Company Ltd.
The Charles Schwab Corporation
The Bank Of New York Mellon Corporation
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Friday:
HDFC Bank Limited
Earnings Season Begins
Note: This missive will be unusually short this week due to some personal circumstances.
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The past week’s price action shows the equity market consolidating with a moderately bullish tone. The S&P 500 gained 1.1%, closing Friday at 7,811.51, just shy of Tuesday’s record close of 7,818.93. The Dow rose 0.9% and the Nasdaq Composite added 0.6%, while small caps slipped nearly 1%.
The 10-year Treasury yield climbed to its highest level since 2002 on Wednesday before easing back to around 5.25% on strong demand at the 10-year auction. Brent crude remained above $100 after President Trump stated that the U.S. would not strike Iran ahead of the midterm elections.
All major asset classes finished the week with gains of at least +0.5%, with cash being the sole laggard as a consequence.
Q3 earnings season starts in earnest on Tuesday, with the big banks reporting. Wall Street did something unusual this quarter: it raised the bar.
According to FactSet, Q3 earnings estimates increased +1.4% during the quarter, compared with an average cut of -2.2% over the past five years. A record 72 companies issued positive guidance, and expected EPS growth now stands at 29.6%.
History suggests the final growth number will climb even higher. Actual earnings growth has exceeded the end-of-quarter estimate in 37 of the last 40 quarters, and FactSet’s projections point to Q3 growth above 35%. Early results show strong “beat” rates, with 84% of the first 19 companies reporting earnings above estimates.
However, the growth is as narrow as the tape suggests. Semiconductors are expected to grow earnings by +126.7%, energy by +118.8%, and technology by +62.6%. In contrast, consumer discretionary, utilities, health care, and financials are projected to grow only +1% to +4.4%.
In contrast to those growth expectations, last week’s trading moved in precisely the opposite direction. Utilities, consumer staples, and energy led the market, while technology slipped and the semiconductor ETF fell -4.5%.
The equal-weight S&P 500 rose +1.6%, outperforming the cap-weighted index. Outside of energy, investors bought sectors expected to grow roughly 4% and sold the group expected to grow 127%. This is the setup heading into earnings season: the index still depends on the chipmakers to deliver (or at least not bomb), even as money quietly hedges against them.
The Fed adds a nuance. September’s FOMC minutes showed most participants still expect another rate hike by year-end, even as payrolls slowed to 29,000 and core PCE came in at 3.0%. With analysts lifting estimates and companies guiding higher, consensus has rarely leaned this hard in one direction. From a contrarian standpoint, “when the experts all agree, something else tends to happen”.
Tuesday’s bank reports offer the first real test. A clean read from the financials sector would reinforce the broadening that began last week. After that, though, any stumble by the leaders would hit the only part of the index currently doing the heavy lifting. September’s inflation data arrives just before the Fed enters its quiet period ahead of the October 27-28 meeting.
Banks are expected to grow earnings by 15.2%, well above the 4.4% forecast for the financial sector overall. With yields near their highest levels since 2002, the key items to watch are net interest income, loan growth, and credit quality. If the banks deliver loan growth and steady credit while the 10-year yield stays above 5%, the case for broader market participation gets real support. So far, the largest US banks as a group have delivered near flat YTD returns, with Citi leading and Wells Fargo lagging by similar amounts.
Technically speaking, SPY has held support at $767 and is attempting a grind higher, above previous all-time-highs. With exceptionally narrow breadth, the rally has been unconvincing so far. Volume does not confirm SPY's recent run to all-time highs either. The advance exhibits classic bearish volume divergence and institutional distribution, signaling buyer exhaustion rather than committed accumulation.
Dollar volume flow was depressed during the recent advance. 1-day dollar volume was $17.47B as of Friday’s close, roughly half the 1-month average of $34.38B. Institutional off-exchange data also reveals net selling under the hood, though to a lesser extent.
As has been the case over the last 2 months, trading remains rangebound. We would be inclined to add near the 50-DMA and M-Trend levels, rather than chase into the highs at the moment.
A break below $767 would warrant raising hedges and cash to a certain extent, as the market would signals buyer exhaustion.
Breadth is where the story gets more complicated. Only three of the 12 sector ETFs sit above their 50-day averages. Technology leads at 5.1% above, followed by energy at 3.7% and health care at 1.2%
A record built on a handful of names and low volume is not the same as a broad advance. However, this is also where a broadening move has room to start. The equal-weight index already outperformed over the past week, as staples and utilities rebounded.
Our Trading Strategy (Sigma Portfolio)
Two narratives collide next week: Q3 earnings season and September inflation data. Wednesday’s CPI report is the main event after August’s 3.4% headline reading. Thursday is packed, with PPI expected to rise 0.5% for the month, retail sales expected to increase 0.3%, and the Empire State and Philly Fed surveys also on the calendar.
Markets are currently pricing in roughly a 20% chance of an October hike, though traders see about an 80% chance of a move by December. The Fed’s quiet period begins Saturday, October 17, so this week is the last chance for officials to shape expectations before the meeting. Any hawkish or dovish lean in their remarks is likely to show up quickly in the 2-year yield.
In turn, the direction of yields will do a lot for market breadth, which is the make or break factor for equities at the moment. Oil remains the wild card. Trump’s pledge not to strike Iran before the November 3 midterms pulled Brent lower, but it still sits above $100.
We will perform our usual rebalancing process in the portfolio and watch the Enterprise model for clues as to overall positioning. If I were to venture a wild guess, I’d say the allocation to stocks remains in place at target levels for now.
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