Earnings season kicked off on Tuesday with a positive reaction to reports from several large banks. The action on Wednesday turned mixed as money rotated out of the software and other high momentum sectors but technical conditions remained positive.
This morning is digesting a strong response to a report from Netflix (NFLX) and a weak response to a report from IBM (IBM) . Other important reports are rolling in this morning from Morgan Stanley (MS) , Honeywell (HON) and a few others, but the big name technology stocks don't start reporting until next week.
There are headlines that China's commerce minister is hoping to reach a "phased agreement" over trade as early as possible with the goal of canceling tariffs on each others' goods. The market is tired of the China issue for now, but there is the potential for incremental positives that will help to provide support.
As we move into the meat of earnings season, technical conditions remain positive and there are indications of better stock picking in the small-caps. This sort of speculative action has been missing for a while -- and if it persists it bodes well for the indices.
The shift of focus from trade headlines to stock picking holds the seeds for more upside. Many market participants are tired of dancing around to the headlines and, in many cases, expectations for earnings reports are quite low. This has created a good environment for bulls trying to put some capital to work in individual stocks.
As usual, the bears have their long list of big-picture negatives. It isn't too hard to write the negative narrative of slowing economic growth, central banks with limited ammunition, politic chaos and a slew of other worries. However, just because it is possible to formulate a logical bear argument doesn't mean the market will care. That is why it is so important to stay focused on the price action. The price action will let us know when the negative narrative might matter. It is usually more profitable to react to changes in market conditions rather than try to anticipate when they will matter.
I'd like to see a continuation of the improved stock picking today. The rotation out of software and some high-beta momentum names caused some problems yesterday, but groups like retail are making up for it. Small-cap outperformance will be an indication of improved speculative interest and that will take the broader market higher.
The market's focus is on the response to earnings rather than macro headlines. Don't be distracted by the things that don't matter right now.