We are about to step into earnings season where pretty much everyone is in agreement that the first quarter earnings don't matter. Quite frankly neither do the second quarter earnings. My question is when will folks care about earnings again? Is it the third quarter or the fourth? Or maybe they prefer to wait until 2021?
I obviously don't have the answer, but what I do know is that even the fundamentally inclined folks don't care about earnings. So, how are those fundamentalists going to form a view on stocks here? I know you, too, are wondering.
Have no fear. On Monday we saw the strategists at Goldman Sachs (GS) , Morgan Stanley (MS) and JPMorgan (JPM) all say the low is in and stocks will go up from here. Oh some said "buy dips" and some said, "new highs are coming," but the message was the same: a change in sentiment.
If you are wondering how we get those Investor's Intelligence bulls and bears to switch places (as of last week there were more bears than bulls but I expect that has shifted this week) then look no further than these investment banks. If you wonder how we will get the four-week moving average of the American Association of Individual Investors' bears to move down, look no further than these view by the banks.
Just remember how the narrative about the Fed has shifted. We have gone from "rate cuts can't cure the virus" to "don't fight the Fed." I do not expect this shift to happen overnight; the low was only three weeks ago. Recall when the market was falling and folks were upset because the Citi Panic/Euphoria Model did not show Panic yet? It takes time to shift that sentiment.
Witness that while still relatively high at 92% the put/call ratio on Monday was the lowest it has been in three weeks. The ISE call/put ratio was quite high. I don't discuss this sentiment indicator very often, but think of it as the inverse of the put/call ratio (which comes from the CBOE). A high reading in the ISE is like a low reading in the CBOE, meaning too many calls relative to puts.
The ISE was the highest reading since November. Yes, November! This means its 10-day moving average has finally seen a rise. While the 10-day moving average of the CBOE's put/call ratio has come down, the ISE's 10-day moving average has barely budged until Monday. It is now on the rise.
So that's how we begin to see the sentiment shift. Aside from that the short term overbought reading gave a small pullback but the intermediate term is not yet overbought. That means Monday looked fairly standard to me. We will watch to see if any of the indicators change in the days ahead. For example, will breadth begin to falter? Will it falter enough to change the indicators? And most importantly, how fast do people shift their market views from bearish to bullish?