Second quarter earnings season starts this week with a number of reports from large banks. Citigroup (C) reports this morning followed by Goldman Sachs (GS) and JPMorgan Chase (JPM) tomorrow. Major reports from key stocks in other sectors won't start for another week.
The setup of the market into earnings has the bears hoping for some 'sell the news' reactions while the bulls are looking for continued upside momentum. Last week, the market continued its celebration of a dovish Fed. There doesn't seem to be a point where the good news of lower rates is fully discounted by the market. Every hint of rate cuts at the end of the month seems to trigger another wave of buying.
This action is pretty typical of a trending market with good momentum. Trying to impose some standard of 'reasonableness' doesn't work. Momentum always will last longer and go further than many people think is reasonable. The technical conditions are favorable and it is important to keep in mind that stocks and indices at all-time highs don't just suddenly collapse. They may rest or consolidate, but unless there is surprise news they don't just fall apart and go straight down.
The bears have been very frustrated lately that the market fails to give their narrative much respect. The negative thesis is that the economy is slowing quickly and the Fed is not going to be able to save it this time with lower rates. The Fed doesn't have that much room to navigate -- and with rates already low, they have limited ability to really jolt the market.
The bulls don't seem at all worried about that scenario. They are confident that rates will be cut at the FOMC meeting at the end of July and that further cuts will follow.
One thing that is particularly interesting right now is that there have been quite a few calls for a market top from major strategists. These aren't perma-bears. They are folks that have been mostly positive for a while but are now concerned that the market is ready to turn.
In many cases, this sort of a bearishness is a contrary indicator and, certainly, is not a good basis for accurate timing. There is nothing in the price action at this point to cause us to embrace the bearish scenario, but should we see a shift in the character of the action, then we will have to take it seriously.
We will see how the market reacts to earnings from banks and we will stay focused on the price action. It is very easy to develop a market thesis, but it is the price action that will tell us the real story.
We have some minor gains in the early going on better-than-expected economic numbers out of China