After a week dominated by endless headlines about a possible trade deal with China, the market surprised nearly everyone on Monday by doing very little. Some market players had expected a "sell the news" response to a less-than-robust deal, while others were looking for a relief rally now that the annoying distraction had been temporarily set aside. Both sides were wrong.
The market is still looking for a catalyst to drive its next move, but with earnings season starting today the narrative is likely to shift. The first major reports that are due are from the big banks. This morning Citibank (C) , Goldman Sachs (GS) , JPMorgan Chase (JPM) and several others report. The first major non-bank reports roll in on Wednesday night when IBM (IBM) and Netflix (NFLX) report.
The market will continue to watch for news and headlines on trade, but earnings season is going to shift the focus to economic growth, the Fed and the prospects of individual stocks and sectors.
Going into earnings season, the market has been undergoing a substantial rolling correction. It has not been reflected in the indices but many stocks have been in a bear market and certain sectors -- like biotechnology, recent IPOs and oil -- have been under extreme pressure.
The good news is that expectations are not high. Despite the resilience of the indices, there is a low level of optimism and no shortage of bearish pundits predicting that the market is on the brink of disaster. Many thought that the failure to make a solid deal with China would trigger a downside move, but now they are looking for poor earnings and a slowing economy to be the trigger for more-aggressive selling.
The main area of disagreement between bulls and bears right now is over the likelihood that the Fed can offset a slowing economy with additional rate cuts. The bears believe that the Fed has run out of ammunition and that the time has come for the business cycle to finally undermine the efforts of the central banks.
Watch for a changing market narrative as earnings season commences. China headlines will still matter, but the focus now is on economic growth and expectations about individual earnings reports. Typically, a theme will emerge during earnings season and that is what we need to watch for at this point.