Premium OP: Earnings Season

Market Review

Globex

S&P 500 Futures:

The ES rallied up to 2785 on Globex and traded 2773.25 on Thursday morning’s 8:30 CT futures open. After the open, the ES sold off down to 2765.50 and then traded up to 2803.25 at 9:00 and sold back off down to a higher low of 2767.50 at 9:23 AM. The ES rallied back up to 2782.00 at 10:28 then hit buy stops up to 2797.75 then up to 2803.50. After pulling back down to the 2270 level the ES traded all the way up to its daily high of 2809.50 going into 12:30 CT. After the high, the ES sold down to the 2755.00 area at 1:50. 

At 2:00 CT the ES traded 2762.50, traded 2782.00 at 2:30 and traded 277.50 as the 2:50 (cash imbalance) MiM showed 150 Million to Buy. On the 3:00 cash close, the #ES traded  2778.00 and settled at 2780.00, up 40.5 handles or +1.48% on the day. 

In terms of the day’s overall tone, the ES rallied but it seemed tired. In terms of the day’s overall trade, total volume was 2.33 million contracts traded minus the 580,000 from Globex making total day volume the 1.75 million contracts traded on the day session.

Economic Calendar

Closing Prices

In the Tradechat Room

MiM

Big bang theory was a bust.  We anticipated a decent imbalance going into the 3-day shutdown but a fizzle it was.  We still managed to do 10 points on the 3:50 pm reveal minute, but there wasn’t anything on the MIM to give a clue. It works that way somehow, so the selloff in anticipation was bought back and we slid quietly (relatively) into the close. 

Questions?  Please email me: Marlin@mrtopstep.com

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Our View

Earnings Season

The first-quarter earnings season is going to give investors their first glimpse of what’s in store for the coronavirus-driven economy/ stock market and possibly an outlook for the rest of the year. This week’s earning results will test the S&Ps over 50% bounce. I really do not believe you need to have a PHD to know that the future is the most uncertain it has been since the 1929 stock market crash. If there was one word to describe the public, it’s ‘scared’. From everything we know the pandemic will more than likely cause a large economic contraction and a sharp decline in corporate profits.  Big companies like FedEX, General Electric, and Starbucks have already said that they are not capable of forecasting their results. It’s my guess the list is going to get a lot longer.

Despite all the negatives, the S&P has been going up for the last few weeks. They say the rally is tied to social distancing practices and slowing the spread of the virus. My thought on that is the S&P had hit extreme oversold conditions and the governmental and federal reserve bailouts have helped save the markets. Last week the S&P rallied 12%, its largest weekly gain since 1974 and is up 25% from its March 28th low but is still down 15% YTD.

Earnings Shadow

Big banks including Bank of America Corp and JPMorgan Chase & Co., along with health-insurance giant UnitedHealth Group Inc., transportation bellwether J.B. Hunt Transport Services Inc. and health-products company Johnson & Johnson, will be the first big companies to open their books this week. While the Q1 earnings are important, investors will carefully scrutinize comments from executives for indications of what will come later this year. Bob Doll, chief equity strategist and senior portfolio manager at Nuveen said ‘There is more uncertainty for this quarter than almost any quarter I can remember, my guess is somewhere between a half and three-quarters of analysts have yet to take a knife to their earnings estimates because they don’t know what knife to take to them and how deep to cut.’ The range of estimates reflects the deep uncertainty about the path ahead. FactSet projects a 9% year-over-year decline in earnings for all of 2020, based on analysts’ expectations for individual companies in the S&P 500, a sharp reversal from the 9.2% growth anticipated as last year ended. B of A Global Research was not as nice, projecting a 29% drop in per-share earnings this year, an estimate that incorporates “cataclysmic losses in travel, restaurants and other industries directly impacted by social distancing” and Goldman Sachs predicts profits will tumble 33% while cautioning that in a more painful slowdown, the decline could be 57%.

I am not going to do any more ‘gloom and doom’. I think this is best summed up by saying that we have a real problem on our hands.  There have been many upside roadblocks to the 11-year bull market but nothing like this. Yes, we have rates at zero but who is going to actually lend money? And if you’re looking for earnings relief don’t look to the second quarter. According to FactSet, the second quarter is expected to see the brunt of the damage based on the current scale of the shutdown. Profits among companies in the S&P 500 are projected to drop 21% in the current quarter after sinking 11% in the first three months of the year and for the second half of the year, profits are expected to continue shrinking, but at a slower pace, falling 9.6% in the third quarter and 1.6% in the fourth.

Our View: The PPT has saved the S&P again! It could not have looked worse at the lows and it couldn’t look better now and that brings me to the point. At the lows, the #ES looked like it wanted to go to zero and now it looks like it wants to test 2850 -2900. I see this two ways. The first is we have seen some very large buy imbalances over the last few weeks so we can not say money was not moving into stocks. On the flip side, if the markets are data-dependent then the S&P could be in for a shock. Our lean is to look for some type of high this week. I am not saying it’s a permanent high but a high that sets up a pullback. Ideally, the 2650-2680 area would be a good testing ground for the ES. We can’t rule out buying some big dips but we think selling the rips may pay better.

Danny Riley is a 39-year veteran of the CME  trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.

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