Yet another earnings week

Abraham George Macro View

Oct 19, 2020

We are still in earnings week. We should hear from about 20% of the S&P 500 companies. So far around 85% of the companies that have reported earnings have beaten earnings and 82% have beaten revenue estimates. That’s all good but aggregate earnings are down 18% from the same period a year ago.

The pandemic environment has provided an easy and great opportunity for companies to put out all the write offs , write downs and reserves for pandemic related uncertainties. That way they are able to optimize earnings coming out of the economic downturn. On top of that household net worth has recovered to record highs.

Thanks to the multi- trillion dollar policy response from the authorities. It put money directly in the hands of consumers, kept many of them attached to a job, with the possibility of re-employment, kept employers solvent and triggered a trend in higher asset values.

So in a way the governments plan has worked. What caused all this was the virus, so the path of the economy should also follow the path of the virus. The positive news is that as the cases continue to grow, the death rate continues to decline. If you do all the math and statistics the real infection fatality rate is down to 0.26%. So even without much additional stimulus the economic recovery could continue.

Equities

Yesterday’s decline in the markets have increased the odds that the intraday high in the Dow at 28,958 on Oct 12 and S&P high at 3516 on Oct 16 will be important. Yesterday’s advance/decline ratio reflected even stronger selling pressure than Friday, with every three stocks that closed lower for every one stock that closed higher. The selling pressure in the S&P 500 was even stronger with almost 90% of the issues in the index closed lower for the day. The break below 3441 in the S&P has enhanced the bearish case. The next short term support is at 3340.

Bonds

There is no change in the bond analysis from yesterday as sentiment for higher yields is compatible with lower bond prices.

Euro

There is no change in the Euro analysis too. Prices should be on the way to challenge the Sep 01 high at 1.2011. Only a move below 1.1611 can derail this possibility.

Gold

As outlined yesterday gold’s price action has been very confusing. As long as prices stay above 1873 one has to entertain the upside but at the same time the price rise so far from 1849 is not an impulse structure. So a break below that low will increase the odds for a much bigger fall. A break above 1934 should interest the bulls.

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