When the S&P 500 closed above 3000 for the first time ever last week, it was hailed by many as a significant moment. If you are familiar with markets from a trader’s perspective, however, you would have been a little more cautious.
Round numbers are often a trap, with traders pushing through them to trigger stop loss orders before selling to force the market back again. So far, last week’s move seems to be an example of that, but if we can break back above the level before too long, it will be a different story. There is a good chance that we will do that this week.
The technical picture and tendencies of traders won’t have changed but a break of 3000 this week, if it comes, wouldn’t be a move based on chart reading and analysis. If we do move higher this week, it will be because earnings have given the market a boost.
What are the chances of an earnings-driven surge this week?
Just based on the sheer number of companies reporting, you would think they are pretty good. Nearly seven hundred earnings releases are due, including some big names such as Boeing (BA) and Caterpillar (CAT), both on Wednesday, and Google parent Alphabet (GOOG: GOOGL) on Thursday.
Given the fact that on average over two-thirds of companies beat expectations every quarter, that means that there is bound to be a lot of good news.
The problem is that all that good news will be about the past. The market does look back more during earnings season that at any other time, but the biggest moves in stocks come from changes to guidance, and on that front, the early returns suggest that good news will be rare.
There is a growing feeling among executives that a slowdown, either domestic or international, is inevitable before too long and negative revisions to guidance have been running at their highest level in years.
What makes that likely to be sustained is that in the current environment it is possible for CEOs to make that call without it reflecting badly on themselves. There are a couple of ready-made excuses out there, and it only makes sense to use them. In early returns, more than half of S&P 500 companies cited “FX headwinds” as reasons for reining in expectations, with tariffs and trade coming in a close second on the excuse list.
Without wishing to sound too cynical, I suspect that in some cases citing one or both of those things has more to do with a desire to attribute blame for a lower guidance to something beyond a board’s control than any measured or measurable effect. There are, however, some companies where such things have a real and dramatic impact, and both Boeing and Caterpillar fall into that category.
I suppose one could argue that the expectation of bad news leaves room for a move up on even neutral earnings, or that, as in the recent past, slowing growth will give stocks a boost on the basis that it makes a rate cut more likely.
However, neither of those arguments really holds up.
Despite the pullback last week, the fact remains that we are to all intents and purposes at record highs. Coming as we enter the heart of what now looks like being the second successive quarter of decline in earnings growth and maybe the first for a while to show no growth at all, the potential good news is obviously priced in.
That includes the positive effects of a rate cut, leaving worry about why such a move is needed as the most likely reaction when it comes.
On the surface, with 3000 now tested and broken once and with earnings, which traditionally support the market in full swing, it looks like it could be a good week for investors. That, however, is not the case. The risks seem skewed to the downside right now and a cautious approach is still advisable.