Conflicting Signals

posted Jan 12, 2015, 10:41 AM by Katie Shook   [ updated Jan 12, 2015, 10:41 AM ]

It appears we have ourselves a mixed bag of data.  On the one hand, the BF Optimism Index is positive.  On the other hand, the BF Trading Signals for the S&P500 and NASDAQ Composite have sells, while the DJIA has a hold.  System-wide we have long signals at 45.62%.  And yes, oil is apparently continuing it’s slide — now somewhere in the $46/barrel range.

What to do, what to do?

Over the weekend the futures opened with very little fanfare.  This is a good sign.  It’s often the case that the futures move clearly in one direction or another after having been closed over Friday Afternoon, Saturday, and a portion of Sunday.  The move is typically in response to a shift in expectation based on the weekend news cycle.  This past weekend we saw very little in the way of new news.  So not much changed.

Of course, while we have a relatively light week of economic data, we do have the start of earnings season again today.  So the markets should begin digesting the numbers and forward guidance.  This is where those mixed signals come in.  It seems a lot of market participants are pretty nervous right now if you were to look at the trading signals as your indicator.  However, the optimism index (which defuses a bunch of fundamental data into a single number) remains pretty solid.

When technicals are mixed and fundamentals are strong, it’s difficult to argue against the fundamentals.  The market is not telling a story that says the bull is dead… at least not yet.  In fact, with the exception of energy and materials, the other major S&P sectors appear to be stabilizing.

If earnings season comes in okay, it’s tough for me to break from the crowd on this one.  History and data both indicate that things could continue to grind higher.  And, in fact, irony and paradox indicate we could see interest rates in the US plunge even further (as the rest of the world panics and shifts more money to the US).

This market has already surprised me in terms of its ability to defy my expectations.  While we know a day will come when things pull back and re-set, it does not yet appear to be that day.  I will be eyeing $40 support for oil (a breach of this level could be troubling in the short-term), forward guidance during earnings season, and commentary from the ECB regarding stimulus.  My guess is it will be stimulus from Europe that gives the markets the next shot in the arm.  And as long as forward guidance is cautious but not pessimistic we will see this thing grind higher.  I suspect another week or two of volatility before the overall earnings trend is discerned, at which point we could settle right back into the pattern of lower volatility, lower volume, and a climb up that wall of worry.

Weekly Estimated Range

Weekly Estimated Range 1-12-15

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