Earnings kick into high gear while rally sputters

The market didn’t really go anywhere for the past week, as advances have been met with repeated rejections near the $417 level on SPY, which constitutes the upper channel trendline resistance. While transaction volumes have languished, “head and shoulders” patterns keep popping up amongst various technical charts. This appears to be the start of a minor risk-off period, in an advance that looks to be running out of steam. The overall trend is higher, and a deeper correction could be used in order to add equity exposure on weakness. Stocks have been on a continued uptrend since mid-March, and 5%-10% pullbacks are the norm in any given advance.

There are numerous catalysts this week (check the Earnings / Events lists above). Microsoft’s call on Tuesday, Amazon’s on Thursday, along with Q1’s GDP Growth numbers that will give financial talking heads plenty to discuss.

As far as we are concerned, from a technical standpoint, there is significant support near the $400 level on SPY, which is our near-term correction target. Both the 50-Day Moving Average and the S1 level converge there. The MACD signal is close to triggering a SELL, which can make for a good excuse to take some profits near this level.

SPY Analysis

From an Internals perspective, the broad market is neither Overbought, nor Oversold, so we would not expect major turbulence. We are slightly concerned that Tech has pushed into overbought territory and a rotation could mean that particular area of the market will “deflate” while defensives will benefit.

Reactions to earnings so far

Q1 Earnings Season has seen a muted reaction to conference calls overall. Measures of the broad market that we track through breadth measures have not “caught up” to SPY’s performance so far. “Head and shoulders” patterns have propped up in 200-DMAs, Z-Scores and a mix of Mid-Caps (MDY) and Small Caps (SLY).

Our conclusion is that strength is not yet prevalent in most stocks. This leaves room for more upside in the next months, as investors digest corporate guidance. The key aspect of guidance will be the evolution of Gross Margins and Revenue Growth, both measures having been under a lot of pressure in the latest period. Many companies are forced to choose between one or another. Tesla was a notable mover last week with the stock dropping after disclosing Gross Margins falling from 24% (2 year average) to 21% in the latest quarter. Tesla was forced to cut selling prices this year in order to maintain Revenue Growth.

In this sense, the “bull market” is not exactly back on the table, as technicals continue to contradict deteriorating fundamentals. However, this is the way many stock runs have started in the past, with investors front-running a resuming of growth in EPS.

Takeaway

A recession in 2023 is no surprise for anybody at the moment. The Federal Reserve itself is predicting a “mild recession” in the back half of the year, and it sounds to us like this bearish fundamental view has become “consensus” at the moment. Usually, when “all experts agree” something else tends to happen.

The NAAIM Exposure Index (tracking the exposure of active managers) has risen to 78% from 12% in October 2022, denoting some cautious optimism. Our view is that (until further notice), we are back in a “buy-the-dip” environment, that we can make use of. We’ll look to take some profits momentarily if weakness persists and get back in at slightly better prices.