I vividly recall, as a child, ripping the head off my neighbor's Care Bear doll in our daily play session. I'm not too sure what prompted such a violent outburst but, as I stared at the headless stuffed animal, there was a sense of disappointment -- because there was nothing exciting inside! All I saw was China-sourced filling -- no superpowers that could bring an end to world hunger and fill towns across the land with majestic rainbows.
I fancy that, for the markets this Monday morning, we have a Care Bear-like sentiment backdrop in place: in other words, smiles. This is troubling, as the indicators I track religiously are unsupportive of such near-term happiness. I fear that, if we were to rip the head off this Care Bear -- that is, peer into the soul of the market -- we would be left with the same disappointment I had as a child.
Foundation of Care Bear Market Sentiment
Fed is not a friend this week: The overall commentary from the Federal Reserve's latest gathering has been akin to putting a wet blanket on top of a campfire. That certainly isn't the intention of a group of policymakers who have continued providing countless assurances to the market in terms of what their potential next round of actions might be. Consequently, the market is sheepishly smiling that a positive #BernankeBomb will be dropped during the Fed chief's testimony this week.
To that I offer this blunt assessment: Is there anything this man has not said to make it explicitly apparent where the Fed's head lies? If you expect more precision and are building long positions rooted in that logic, be prepared for another letdown.
Market is digging any positive it can score: Didn't Alcoa (AA) post earnings last week? The market seems to have a short memory, choosing to extrapolate a "not as bad as advertised" second-quarter earnings season thanks to figures from JPMorgan Chase (JPM) and Wells Fargo (WFC).
Man, does sentiment turn on a dime. Coming into Alcoa's earnings release, market sentiment was very downbeat, and Alcoa fed that negativity. JPMorgan and Wells Fargo, however, ignited the kind of hope I didn't want to see in the week before earnings really begun to flow. I'd have preferred investors selling the news events, thus bringing stocks back into oversold territory as earnings are announced. Keep in mind this mindset applies to initiating longer-term long ideas. In any case, the result of that modest hope infiltration has been that the bar has risen ever so slightly, just as corporate fundamentals are set to show a sequential weakening and as we see the start of a second wave of estimate cuts for full-year earnings.
Here is something fresh to the scene: Upon waking this morning, was the term "macro troughing" a thought at all? It probably wasn't -- but you have now been put on notice regarding this growing view on the Street. Macro troughing refers to economic reports that are getting less bad on a month-to-month basis and are not slipping below consensus by a sizable amount. It appears macro troughing is being sought to justify buying in to second-quarter warnings season (and yes, that would be "warnings season").
I am not sold on this, given the severity of the deceleration in May and June macro readings. Should you disagree, the Empire State Manufacturing Index and Philly Fed Index -- which both printed horribly in the previous month and set up for the limp Institute for Supply Management manufacturing output -- are where to go with your notepad. Key focus: not the headline, per se, but on the employment components.