The market’s rally this week was a positive sign; it shows that buyers are seeking good deals and that investors have not become too worried about another decline.
It is also a good indicator that the bounce occurred at a critical level on the S&P 500 around 3,590. Solid support is a sign that there are enough buyers for prices to not crash.
As we have said for a few weeks now, earnings in the third quarter should be better than anticipated. Stock prices should stay below their floor as long as consumers still spend. So far, this is how earnings season is going.
Even though things look good so far, we need to be cautious about our expectations. It is not common for a bullish rally sustained to begin with huge reversals as last Thursday.
Investors are usually uncertain. Market prices often discount uncertainty. The economic negatives, such as inflation, rising interest rates and slowing world economy, are still significant enough to make uncertainty high in the short term.
Our view is that both the positives (and the negatives) are balanced enough to maintain market stability and prevent any major bullish breakouts.
So we’re settling in a gray zone for now.
However, earnings season is in full swing and we have plenty to look forward…
Earnings
Although it is early in the earnings season, there are some positive bank reports. The banks did remarkably well when the banks add in the non cash losses they had saved to cover loan defaults next yr (if there is a rise in unemployment)
This is a great example of how we mean it.
This is the highest net income it has seen in 10 year. According to BAC Management, consumer spending on credit-cards increased 13%. This was good as most of the spending is on leisure and travel, not essentials like many analysts had feared. The bank also reported the lowest rate of loan defaults in its history.
While inflation is a problem for consumer spending the BAC report supports our view that it have not influenced enough consumers so far to pose a serious economic threat. This news does not have any negatives. The Fed will continue to increase interest rates as long consumers demand is high. It will sell bonds and raise its overnight target.
We don’t believe there will be a significant break below our support until we see further declines of consumer spending and corporate profits.
Upcoming catalysts
Over the next three weeks, there are two important factors that will most likely decide whether the market stays within its channel (which it is) or breaks out towards the downside.
Tech Earnings
Earnings season is picking up, and tech companies are starting to trickle in.
These reports will greatly impact investor sentiment prior to the Microsoft Corp.’s (MSFT), Apple Inc.’s (AAPL), Alphabet Inc.’s (GOOGL), Amazon.com Inc.’s (AMZN), reports next Wednesday.
We expect tech firms not to give a low guidance during earnings calls. This will make it easier for them to beat the next quarter. We expect tech companies to simply point to a strong dollar, ebbing global demand and slow growth rates this quarter. What matters most to investors is whether those trends will continue.
The Fed
On Nov. 2, almost certain rates will be raised by the Federal Reserve Open Market Committee.
The bond market currently prices in the possibility of a 95% hike to 0.75%. We can assume that traders have already included this change in their current market levels.
We are not sure what the Fed chairman or other governors will say regarding the hike, nor the pace of future increases.
Members of the FOMC have recently stated that there will likely be some debate as to whether rates will rise in 2023 at exactly the same rate as 2022. However, this was prior to the CPI data, which exceeded expectations.
Analysts and traders worry that Fed members could adopt a more hawkish tone but less “debate” which could spell doom for stocks. While we are confident that the Fed will stay consistent, it is possible that this is the most significant wildcard.
Bottom Line
According to our assessment, there is a fair balance between the positives and the negatives in the market.
Traders prefer clear, black-and-white answers. This can cause discomfort. If you are feeling frustrated at the market’s unpredictable swings, it is normal.
We plan to keep using the same strategies that perform well in a channeling environment. It means selling calls at resistance and buying them back. Or writing short puts at lows. We will inform you as soon as we have more data from earnings, the Fed, and unemployment (Nov. 2 and 4 respectively) if this changes our outlook on strategy or outlook in any significant way.
We still have a proven strategy which works in every market. Our win rate for this year is a remarkable 95.94%.
This type of win rate, however, is possible. Anyone can tap into it and make instant income of hundreds to thousands of dollars, depending on their desires.
Louie Navellier from our team flew to America’s poorest areas to show the people what it was like.