A better-than-expected earnings report from Netflix (NFLX) is giving the Nasdaq a boost in the early going, but the overall market is struggling with inflation and slowing growth. Alphabet (GOOGL) joins a long list of big-cap technology companies that are laying off personnel, but that doesn't seem to dent the overall perception that the labor market remains strong and is the main cause of inflationary pressures.
Earnings season will be the primary focus next week and will be particularly important as it is going to have a significant influence on perceptions of an impending recession. So far, earnings have been generally weak. Banks were unable to hold up, and there have been far more earnings misses than usual. Netflix is by far the best major report so far this quarter, and that was mainly due to forward guidance rather than actual results.
The problem that the market is facing right now is that inflation is clearly dropping, but it is unclear to what degree the hawkish Fed policy will produce a recession. On the one hand, the market is still celebrating bad news because it is anti-inflationary, but on the other hand, there is growing concern that bad news really is bad news because it means the economy is slowing and a recession is likely.
Bullish market participants hope that a recession is already discounted to a great degree and that slowing growth will push the Fed to a dovish pivot sooner rather than later, but Fed speakers continue to insist that rates will need to stay higher for longer to conquer inflation. The market doesn't want to believe them, but that is what is holding the market up right now.
Technically speaking, the market is locked in a trading range as the economic battle continues. Earnings season is likely to determine which way things break. Most strategists believe valuations are still too high and that as earnings unfold this overvaluation will become evident and will push the indexes to test the lows. We shall see.
My game plan is to remain patient and stay laser-focused on price action. Momentum has cooled and there are no obvious signs of momentum. On the other hand, many smaller and secondary stocks are holding support. There were only 57 new 12-month lows on Thursday, which illustrates that there are not many charts breaking down. That can change quickly, but so far support is holding.
Netflix already has dropped significantly from its overnight highs and will be a good test of how willing market players are to chase good news right now.
