The consensus view among market strategists is that stocks will suffer another substantial pullback or two before the miserable bear market comes to an end. The theory is that concerns about inflation and slowing economic growth will produce some struggles as market participants try to fully discount the obstacles that lie ahead.
This all sounds quite logical, especially compared to the bullish hope that the Fed has already won the battle against inflation and will be able to engineer a soft economic landing that prevents stocks from falling into another downtrend.
The primary question that traders need to consider is the timing of these potential upcoming dips that will eventually lead to the resolution of the bear market. Several market strategists and pundits believe that it will be fourth-quarter earnings reports and management guidance that causes an examination of valuations and leads to more downside.
The meat of earnings season starts Tuesday, and we will find out soon enough. So far, earnings have been mainly from companies in the financial sector and one very good report from Netflix (NFLX) . To date, the ratio of earnings reports that have beat Wall Street consensus views has been extremely poor. Typically about 70-80% of companies will beat consensus EPS estimates, but this quarter the ratio is under 50% so far.
Despite the lackluster earnings, the financial sector (XLF) has held up quite well and been about flat since this earnings season started. The saving grace has been Netflix, which caught underinvested bulls by surprise and squeezed shorts as it helped to drive up big-cap technology stocks. It has been like the old days recently as the FATMAAN names have led the market higher and created some very positive sentiment.
Cold, hard reality will start to hit Tuesday, however, as we see earnings from the likes of Johnson & Johnson (JNJ) , General Electric (GE) , 3M (MMM) , Verizon (VZ) , Texas Instruments (TXN) , and Microsoft (MSFT) . We will have to wait another week before we see more of the big-cap technology names.
The question of the day is whether these earnings are going to be the signal that another down leg is coming. The indexes have become a bit extended and sentiment a bit frothy, which is a good setup for a "sell the news" reaction, but the bulls are hoping that there is still too much negative positioning and that some OK reports will force those on the sidelines to start climbing the wall of worry.
The clues will start rolling in very quickly, and I'll have an update in a few hours.
