The Ugly, The Bad, and the Good

Earnings season kicks off this week.  Will it spark a sell off for the market?  Or will we see a continuation higher off the 2016 lows?

Since it's 2016 and negative is the new positive - instead of looking at the Good, the Bad, and the Ugly.  We will flip it around.

• The Ugly.

Yes the Ugly.  In 2016, negative is the new positive, and Ugly is the new Good.  Why do I say ugly is the new good?  Because earnings are going to be ugly this quarter.  Real ugly.

Earnings are set to drop for a fourth consecutive quarter.  The last time that happened was in 2008 and 2009.  (from Factset)

For Q1 2016, the estimated earnings decline is -9.1%. If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009

Why is an ugly earnings season Good?  In this ass backwards market we live in, earnings are expected to be so bad, anything above a bankruptcy filing will suffice.  The bar is set incredibly low.

What stocks have the best chances to beat these low expecations  this quarter?

Earning season kicks off this week with some of the headliners being $JPM, $WFC.  Financials have been lagging this rally and a stock like $JPM reached its 2016 highs in March, well before the rest of the market.

Financials have already broken the uptrend from 2009 and are in the early stages of a reversal lower.  Hopefully Mr Dimon has more cash lying around one of his summer homes to buy more $JPM stock.

The Ugly earnings season could actually spark a rally.  If stocks can beat already low expectations the Ugly could be Good for the stock market.

• The Bad

Momentum is fading from the February lows.  Bearish patterns continue to pop up.  Moving averages are rolling over.  And on Friday, for the first time in quite a while, a strong morning rip gave way to selling in the afternoon.  Sell the Rip was back.  If you can recall earlier this year when the market was in  the midst of its worst start since the Mesozoic Age, rips were getting sold left and right.   The market bottomed in February early in the trading session as the dip was finally bought.  That buy the dip mentality has returned with vigor over the last eight weeks.  Morning weakness turned into passionate afternoon strength.  Rinse, repeat, and kaboom - stocks are higher than they've ever been in the year 2016.

Rope - A - Dope   The market continued to fool participants into thinking it was going to fall before unleashing a bevy of body blows and launching the indices skyward.

As the market gyrated around the last 1.5 years, moving averages have come back into play.  Two previous tests have just been a launch point for new highs.  But the previous two have resulted in a massive market meltdown.  You can also look comparatively at the recent trading volatility with that prior to the 2008/2009 financial crisis.  The price action has been anything but steady eddy the last 18 months.

A great indicator the last few years has already rolled over.

Some of the sharpest moves in the market have occurred when this indicator trips a sell or buy signal.  We also have moving averages rolling over.  Is the market going to fall 2-5% from here?  I don't know.  We could rally 5% on Monday.  The Japanese could manipulate the YEN 3% lower Sunday night.  The Chinese could build another 4 ghost cities.  The FED could move the rate hike talk out to 2017.  Anything can happen.  This market is more Central Bank dependent and less data dependent than it has ever been.  But the charts show a market that is weary and losing momentum.  Friday's action showed a market that was selling the morning spike.

This past week $SPY $204 offered strong support.  Even late on Friday with the market on its heels, buyers were able to spike the $SPY out of the $203's.  A break of this level will be constructive for a move to test $200 by weeks end.

This coming week is also an OPEX week.  We may have more of the same Spike-O-Rama as last week but let's watch that $204 level.  The more tests, the more likely that level breaks.

and finally we get to the Good.

• The Good

In 10 years or less we will know with 100% certainty if this is good or bad or ugly.  If this was Jeopardy I just gave the question to the following answer - negative interest rates.  Their are many who right now think negative interest rates are terrible.  The banks, for one, are losing their minds over it.

Negative interest rates.... I think the last 10 years have numbed us all.  If Low interest rates for an extended period of time were to blame for previous asset bubbles, negative interest rates are that much more dangerous.  Clearly Central Banks have lost their minds.  Screwing over the hard working savers hasn't been enough.  Are we to teach our children not to save?  And the money is supposed to go into the stock of companies that have been piling on cheap debt to fund their own share buybacks?  We are in the biggest debt bubble in the history of the World, the question is, how much bigger can it get before it pops?

What's worse is these Central Banks can never default on their debt.  They have an unlimited credit card.

And its fed to corporations as well.  They are taking on debt hand over fist, not to fund growth, but to fund dividends and share buybacks.

Unlike the Central Banks, corporations have to pay back their debt.  But what if the Central Banks themselves are the ones buying it?  The ECB just announced it was branching out into the corporate bond business.  Yep.  It's safe to assume the corporate debt market will continue to surge as the buyer of all resort can buy any and all corporate debt.  Seeing how the Central Bank can't default the risk on corporate bonds drops from low to infinitely low.  Perhaps next the Central banks will start buying milk, cars, and boats.  And if that doesn't work they will start dropping money from the skies....

You think I'm joking?

HELICOPTER MONEY IS REAL

The Central Banks will do whatever it takes to stop the economic cycle.  The question is, what will it mean for the stock market?

We can look at all the charts, all the economic data, all the wild currency moves, and think the stock market is ready to crumble,   but when you are dealing with Central Banks backed into a corner like a rabid animal ready to throw money from the clouds....  it would be negligent not to think this market won't continue to new all time record highs.

•  Negative is the new positive.
• Terrible earnings are bullish
• Down is the new up

The Ugly, the Bad, and the Good.  Does it really matter?  It's all going to get real ugly... the question is when?  When will this massive debt bubble pop.  And how much further will Central Banks go?

Have a great weekend and see you in the chat room Monday Morning.