What are earnings and technicals telling us?

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Today I thought it would be good to go from our usual macro overview and obsession with fiscal and monetary policy to a more micro perspective of how firms are doing with their earnings, and how certain technical levels suggest the market might be moving. We close with a brief analysis of that old adage: “sell in May and go away (until end of September/early October")” - does it hold through this (election) year?

Let’s dig in.

First a brief overview of the week thus far. Boring and slow. And you know what they say: “never short a dull market”. When there’s no major events, and just regular market activity, there usually tend to be more buyers than sellers out there, and markets grind up slowly. That’s what we had this week, a gradual grind, not really ideal for a directional options strategy that we use, but great for playing things like condors or butterflies (we don’t do that any more, as the risk-reward is not what we’d like, but it was a decent strategy for the week).

Technicals: bullish…

According to most institutional research reports, it would seem the April correction is good and over, and that momentum is turning bullish again. Price is back above the 50-period daily MA (after being below it most of April), and the % of SPX stocks hitting new 52-week highs is confirming the cyclical bull market. On their way down in April, we never even got close to the 4800 level which was the previous breakout and current major support.

As for the levels, we approached one this week for SPX, there is a big supply area above 5200 (meaning an area where sell orders would typically wait to get filled) with the March high of 5265 being the big resistance point. We touched into this area on Friday and pulled back quickly. If the positive momentum should continue, it should break above these areas first.

However, always look at these things with a grain of salt. Technical indicators might be pointing to one direction, but can also quickly turn against you. I would attribute the recent bullish run primarily to the FOMC decision from May 1st - that’s when the momentum started and it’s still rallying, as we implied it would, at least in the short term.

Next week we get inflation numbers, and it’s also an options expiry week. Therefore the view expressed last week is still unchanged.

Earnings: charging the grind up

Thus far, with more than 90% S&P500 companies reporting their earnings, 78% of them reported a positive EPS surprise - and this is above the 5-year average. And they beat it by some margin. Thus far, the year-over-year earnings growth rate is 5.4%, which is the highest rate reported in the past three years. As we keep saying, strong economic growth necessitates good company earnings. However, according to Factset’s Earnings Insight report, if you exclude the Mag7 companies that reported thus far, “the S&P 500 would be reporting a year-over-year earnings decline of -2.4% rather than earnings growth of 5.4% for Q1.”

But we know this to be the case, equities overall are driven by these highly profitable and growing giants. As for revenues, Q1 2024 now marks the 14th consecutive quarter of revenue growth for the S&P500 companies. This is some momentum.