Daily update 10/22 How are earnings doing?

Mario Draghi saves the day for the bulls.  He said they need to reevaluate their QE program at the Dec. meeting.  Traders took that to mean there is more easing to come.  The futures shot up before the open on the comments and buyers poured in during the day.

The Draghi commments helped SPX to blast through significant resistance.  It is now spitting distance from the 200 SMA.  That was the biggest volume on an up day since coming off the crash low in Aug.  The breadth was +73%.   New highs popped to 114.  Oddly new lows increased to 54. That is not the only odd thing today.  I will have more on that later.

The futures had a great day.  They even added another 10 points after the 4 PM. close.  I have no idea what that was about.  They just kept rallying right after the close so I don't think it was news related.  It was enough to leave us with a blue bar though.  The last blue bar only caused a pause and not a pullback.  However, we were not over bought at that time.  This one comes just a smidgen below the SPX 200 DMA and an overbought condition.  The risk of a pullback seems a bit higher this time.

Today's strength sent the green count up to 64 and well above the 50 mark.  Of course it is up in the area where most short term tops have been the last few months.  I can't say if anything has changed to make that different now. The red count barely dropped. 

Lets see what Draghi's comments did to the dollar index.

DXY recently suffered an infamous death cross (50 SMA crossing below the 200 SMA).  If one has studied this technical formation a while it becomes obvious that most of the time the low is in for the correction by the time it triggers.  The death cross really indicates it is time to make a decision whether this is a top or just a correction.  Thanks to Draghi's comments the dollar bulls went crazy today.  It crossed back above the 50 and 200 SMAs on a strong thrust bar.  The dollar needs to prove it can stay above those MAs and conquer the key resistance line.  With the rest of the world easing and the FED standing pat I think that could easily happen.  I think this has probably started a move to test the highs from last spring.

Here is a nice summary from Bespoke on the companies that have reported so far.  Top Line Numbers Very Weak This Season

Just over 200 companies have reported earnings since the quarterly reporting period began two Thursdays ago.  As shown below, the percentage of companies beating bottom-line earnings estimates so far has been relatively weak at just 57%.  Below is a look at the historical quarterly earnings beat rate since 1998.  The average over this entire time period has been 62%, so this season’s reading is already 5 percentage points below average.

While the bottom-line EPS beat rate has been weak this season, the top-line revenue beat rate has been downright abysmal. As shown below, just 41.5% of the 212 companies that have reported this season have beaten revenue numbers.  It’s much harder for companies to mess with their numbers to meet top-line numbers than it is to meet bottom-line numbers, and this season’s top-line beat rate is tracking horribly.  There’s still a couple thousand companies left to report, so it’s not a complete picture by any means, but the season is not off to a good start.

So far the revenue beat rate is worse then it was in 2008.  That is after much lowering of estimates.  This number is probably going to improve some as more companies report, but it is going to be decidedly bad.  I heard Bob Pisani say many companies are blaming the dollar for their misses.  If the dollar continues to rally it will only get worse.

What happened today does not make any sense if you think about it.  Both the dollar and SPX up strongly at the same time.  On top of that mid and small caps stocks lagged.  Those groups are much less affected by a rising dollar then the big caps.  My guess is one of those indexes will reverse course in the days ahead.  The news was more fundamentally good for the dollar (more European QE equals weaker Euro) then for U.S. stocks.  I suspect the odds of stocks doing the reversing are higher.

Big volume up days after a long rally often turn out to be buying climaxes.  Today certainly fits the description.  The 200 DMA is now easily in reach so it could be touched before we reverse.  Of course overnight people could completely rethink that strong dollar is good for stocks thing.  After this buying stampede if SPX drops back below 2040 in the days ahead it could ignite a rush to the exits.

Bob