Today's market action, if one could call it that, is indicative of a market that is full of complacency.
Friday is a quadruple-witching for the markets -- stock index futures, stock index options, stock options, and single stock futures all expire -- so I would not accept any large moves as we progress through the trading day. Futures traders like round numbers and 3,000 is about as round as it gets for the S&P 500, so I would expect those futures to hover above that line, although gains will likely be capped by a practice known as "pinning."
Pinning is when a trader of options of futures tries to pin the price of an underlying instrument near a strike price as expiration nears. That's what's happening Friday, and some might say that dullness is the new volatility.
I would not be one of those commentators. I think this market is ready for another bout of volatility as we head into October, a month notorious for its market routs. This week the Fed gave the markets what they wanted -- a 25-basis point cut in the fed funds target rate -- although, as I discussed in my Real Money column yesterday, Jerome Powell and the FOMC delivered that cut in the most dysfunctional manner possible.
So, what's next?
Well the next Fed meeting will be held Oct. 29 and 30. CME's FedWatch tool is currently pricing in a 42.8% chance of another 25 basis-point cut at that meeting. Unless there is a marked deterioration in U.S. economic data between now and then, I don't believe such a cut will occur.
Any action from the FOMC should occur at the Dec. 18/19 meeting or Powell's rhetoric of the last two rate cuts as "mid-cycle adjustments" would be exposed for what they really are: frantic reactions to an amorphous conflict between the U.S. and China and moves that clearly show the fingerprints of the man that lives at 1600 Pennsylvania Avenue.
I can't believe I am writing this, but I believe the FOMC will show some spine and not cut rates in October. At the margin that would be negative for equities.
What about that trade war?
One thing I can guarantee readers is that the folks who are opining about trade tensions on CNBC and elsewhere have no idea what is going on in those discussions. I have been to the Middle Kingdom for all of seven days of my life (the Great Wall is even more majestic in person than in pictures; you should check it out if you haven't been) and I know more about China than the so-called experts whose opinions I read in the financial media.
As I have mentioned many times. I am a former sell-side auto analyst. Chinese car sales have declined for 14 consecutive months. The economy has slowed dramatically, and the debt burden has not decreased. China should still be the main brick in the market's wall of worry, but the attention span seems so short today.
Car sales in the U.S., in contrast, have held up well in 2019. Also, the UAW's puzzling decision to strike General Motors (GM) will allow America's largest carmaker to trim inventories in the midst of model year-end closeouts.
So, if the car industry is a bellwether of economic activity -- and my experience shows that it is -- the U.S is doing well and China is doing poorly. Trump has won the first round of the trade war, but I don't expect Xi will capitulate easily. Watch out for that.
The last factor to watch is corporate earnings. This should always be the most important factor in evaluating any corporate security, but in today's top-down, ETF-driven markets, earnings only seem to matter four times a year. Well, for most of the S&P 500, October Is one of these four times, and third-quarter 2019 earnings are going to be ugly.
FedEx's (FDX) earnings bomb was just the beginning, in my opinion. FactSet's consensus estimates a 3.7% decline for S&P 500 EPS for the third quarter, which would represent the third consecutive quarter of decline, and my sense is that that estimate is too aggressive.
Yes, as someone who played the game for 11 years, I know that earnings estimates for a quarter tend to decline as that quarter progresses -- the estimate for the S&P 500 third-quarter 2019 EPS decline was only 0.7% as of June 30 -- so that companies can easily beat those lowered estimates.
My last fearless prediction for this column is that that is not going to happen this time. Estimates do not reflect the slowing in Western economies and the skidding in emerging economies like China and India. I just don't think the U.S. consumer can bail out the entire S&P 500 this time.
So, I am looking forward to volatility in the markets in October, with a bias to the downside coming from the current near-all-time-high levels. It should be a fun month.