Market players are nervously awaiting the kickoff of earnings season next week. There is great concern that trade wars and a slowing economy will lead to warnings and lower guidance.
An earnings report from German chemical giant BASF (BASFY) is exactly what many are afraid of. The company blamed the trade war between China and the U.S. and a global economic slowdown for a profit warning. The stock is down about 6% on the news and German stocks on the DAX are down about 1%.
The bulls have not been too worried about a poor earnings season as they are confident that Jerome Powell and the Federal Reserve will ride to the rescue with lower interest rates. The market believes a quarter point cut at the meeting at the end of July is a near certainty, but after that, the level of continued dovishness is uncertain.
Fed Chair Powell is scheduled to make a speech this morning about bank stress tests, but will appear before congress on Wednesday and will be grilled over his views on interest rate hikes. He will likely stay noncommittal, but the market will be hunting for any hints about which way the Fed is leaning.
The battle in the market right now is very clear. On one side are the bears that see a slowing economy and the difficulty of a trade deal with China and on the other side are the bulls that are confident that friendly central banks will keep the spigot of cheap capital open and provide the fuel the market needs to continue its uptrend.
Right now, the market is betting on the Fed but there is some nervousness about how long its magic will last. We are at a different point in the economic cycle now and have not previously dealt with the situation where the Fed is trying to prevent the cycle from turning rather than just extending it.
While I'm concerned that the market may be overconfident in the Fed, there still isn't enough of a shift in the price action to embrace that scenario. The indices are holding up, there are still some pockets of leadership and there aren't any major technical warnings. There is some softness in places and upside momentum is narrow, but there are no blaring warning signs in the price action at present.
My game plan is to continue to manage positions closely and to keep looking for new buys. I'll be raising my cash levels quickly on further weakness, but we'll have to wait a week for earnings season to start before we have a better idea of where this market is heading.
There are plenty of negatives out there right now, but the price action still indicates some underlying optimism.