Crosscurrents Begin Q3 Earnings

Tuesday was the first real distribution day in the stock market since just before the end of Q3 when we had a successful test of the August 24/25 lows.

Wednesday, the market was massive tug-of-war amidst inconsistent earnings reports.  The market has also been overshadowed all week by conflicting signals from numerous high ranking FOMC officials on the speaking circuit. It’s fitting that it takes place not only at the beginning of the Q3 earnings reporting season, but also while there are many other moving parts in play.    

Crosscurrents Begin Q3 EarningsWMT and INTC were the yin and yang of the stock market on Wednesday. WMT gave a stark warning for its 2016 revenue forecast the day after a disappointing September retail sales report that included downward revisions for August.  WMT had its worst stock price decline in nearly a decade.

The world’s largest retailer whose annual sales are 10% of all consumer spending is battling competitive pressures on many fronts.

INTC opened 2½% lower after reporting Q3 earnings Tuesday afternoon.  By 12:00 it was flat on the day. INTC finished the day +2.4% at $32.80….veryCrosscurrents Begin Q3 Earnings impressive!! as it completed an “outside day” that could become an “outside week” continuation pattern, while closing at its best level since early June.

Its also noteworthy that INTC held the  breakout above the 200 day moving average that began just last week.

Crosscurrents Begin Q3 Earnings

On the Macro side, the market seems to be having a major internal fight over what should carry the most weight with investors as we plow through the fourth quarter.

The FED is certainly a big issue. Inconsistent messaging of late has been somewhat disconcerting, although sentiment has shifted quite a bit during the last week toward the view that an initial rate hike in 2015 is unlikely.

Crosscurrents Begin Q3 EarningsFor most of the last few years the “ZIRP forever” mantra would fuel a “Risk On” market void of any valuation concerns.  We’ve had flashes of the Risk On trade the last couple weeks, but not with the exuberance of 2013 through mid 2015.

Investors are conflicted between committing to ZIRP for another 6 months, when the underlying reality is that it’s only there because the economy at risk of receding, not progressing.  A perfect example of the angst some investors feel is the miss Tuesday by September retail sales combined with the downward revision for August.

This prompted many sell side economists to lower their projection for Q3 GDP to the +1% to +1.6% range.

Q3 Earnings have yet to give investors a positive catalyst, rather have displayed too much of the disturbing trend started in Q2 where companies miss revenue projections, but “manage” to beat bottom line EPS by an +$.01   this of course fuels the valuation concerns that so far have been mostly contained to the uber high beta sectors of the market.

Note also that the 10 year note is struggling to hold at 2.00%, and for the first time ever, 90 day t-bills were priced at 0.00% at auction last week  

Here’s a closer look at the extent of the pullback over the last 2 days:

The S&P 500, -1.2% at 1994.24  again failed to clear the September 17 intraday highs of 2020. A sharp recovery rally from the Tuesday opening lows took the S&P 500 through the 2020 level for no more than 30 minutes mid morning before failing at that level for the third day in a row.

Crosscurrents Begin Q3 Earnings

The 50 day moving average is at 1987.  That should be a first level of near term support if the early rally this morning doesn’t hold.

NASDAQ, -1.2% at 4782.85  and the Russell 2000, -2.3% at 1136.87 could not hold their recent advance through their 50 day moving averages.  The Russell has been the worst performing broad market index in the second half of the year, losing 12.5% in Q3.  NASDAQ has lagged the rally enjoyed by the S&P 500 the last 2 weeks, held back by a valuation correction in Biotech stocks, and underperformance in Internet/Social Media names.

The DJIA, -1.2% at 16,925 had its 10 day winning streak snapped Tuesday.  Wednesday, the decline would have been much worse had INTC not had its impressive reversal During the last 2 weeks the DJIA has recovered much of its underperformance from the last 2 quarters.

Crosscurrents Begin Q3 EarningsBlue Chip names in the DJIA have benefitted from a tempered pace to the rally in the US dollar, the dividend yield of many DJIA names, and a bit of a flight to quality by equity investors as many of the high beta names have seen profit taking.

90 Minutes into the day, broad market averages have gains of slightly better than +0.5%.  We won’t know how committed the buyers really are until we see another test of the resistance levels that halted the 2 week rally Tuesday morning.

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