Dear Reader,
“HEY EVERYONE… WATCH THIS!!”
If you live in Cincinnati, it sounds more like “HEY Y’ALL… WATCH THIS!!” You get the idea, though.
The moment that someone yells that in a crowded area, it’s impossible not to turn your attention away from what you’re doing to watch.
A lot of the time, the momentary distraction offers a laugh or some entertainment. But that attention grabber is also something that can come with a cost.
The market has its own version of “HEY EVERYONE,” and many investors get distracted enough to change their disposition on the market when they hear that phrase.
Here’s what I mean…
I’m talking about headlines, like this:
And we’ve got an extraordinary example of how they can work this week. I’ll get to that in a minute… For now, remember that they can come with their risks.
My message today is simple.
Watch the data, not the headlines.
I want to spend our time together talking about the alternative to headline investing. My goal – to take the emotional baggage that comes with following the headlines and jettison it from your investing process.
Repeat after me… “I will not listen to the headlines over the next month”. I promise, you’ll be a better investor for listening and following my approach.
OK, now let’s get to the headline of the week:
Bill Ackerman is known for moving markets. His views and comments move stocks, bonds, and the market.
We saw a great example of this on Monday as the trader announced that he had closed out his shorts on the bond market.
The headlines couldn’t have been timed more perfectly for the market. But I want you to focus beyond the headline, beyond the moment. Just imagine Bill Ackerman yelling “Hey Y’all I closed my bond shorts!” (if you need help tuning it out).
Instead, focus on the data that this market is giving you. That’s all you need. The headlines are just noise in a relatively dour trend.
I said that the headline was timed perfectly. Here’s why…
At the time of the headline, the S&P 500 was breaking below its 200-day moving average for the first time since January of 2022. And in case you don’t remember, the market was breaking into a bear market trend at that time.
Ackman’s headlines bolstered the market by more than 1% as yields backed off their highs, allowing traders to breathe a sigh of relief. But you must remember, that was only a moment stitched into a period of weeks that is proving critically important to the market’s direction for the next 68 days.
I’m not going to go into discrediting Bill Ackman. The guy is a Billionaire for a reason, he trades well.
What I will do is give you three data points to watch over the next two weeks that will likely determine whether the market closes higher or lower from here 68 days from now.
Data Point One: The Percent of Companies Providing Positive Earnings Guidance
There is no season in the market that generates more headlines than earnings season.
Investors often watch the results hit the tape and make their judgement off of the last quarter’s earnings results. Something as simple as “did the company beat?” serves as the market’s barometer. I want you to change that thinking right now.
Historically the S&P 500 peaks as earnings per share (EPS) growth peaks. That’s a fact.
Earnings per share growth (EPS) is a rear-facing data point. It doesn’t tell you where earnings are heading, it tells you where they’ve been. Sure, a positive trend is good, but it doesn’t tell you what next quarter’s results will be.
Earnings guidance will though. Companies announce their earnings guidance most often during their conference calls. This gives insight of where a company’s management sees things from a forward-looking perspective.
As of October 20, 2023, there were seven companies from the S&P 500 providing positive guidance and six providing negative. That ratio will take a heavy tilt over the next two weeks as more than 50% of the S&P 500 companies head into the earnings confessional.
In my opinion, this is the single most important earnings-related number to watch right now.
Want proof?
This morning’s earnings from GM provided an earnings per share (EPS) beat by $0.41. Guidance for 2024 was negative. The stock currently trades lower for the day with the market up 1%.
Guidance is king in this market.
Data Point One: The Trend of the S&P 500’s 50-day Moving Average
This data point sounds complex to monitor, but it’s as simple as 1 or -1.
That’s right, completely binary.
The trend of the S&P 500 turned negative on September 20th. As it stands now, the S&P 500 is about 5% lower than where it traded that day and is currently testing the critical 4,200 level.
Intermediate- to long-term investors need only watch the trend of this moving average to determine when the market’s “all clear” signal has been sounded. By the simple nature of this trendline you will miss the market “bottom”. Let’s be honest though, calling a market top or bottom is a fool’s game. You’re better served calling the “bottomish” in a tepid market, and this number will do it well.
How do I assign a +1 or -1 to the trend?
It’s as simple as checking whether the current 50-day moving average of the S&P 500 is higher or lower than its reading five days ago. That’s it. No fancy algorithm or AI needed. Higher or lower gives you a +1 or -1 respectively.
Is this effective?
The last time this number went from -1 to +1 was November 2022. You missed the bottom by about 6%, but it captured 18% gains.
The last time the number went from +1 to -1 was ahead of a 22% decline in the S&P 500.
Bottom line, this is a number worth watching.
Data Point Three: 5%
Revisiting the Bill Ackman headline once more, the yield on the 10-year Treasury hit 4.98% for a whisper’s moment within the headline’s timing on the tape.
Don’t for a moment think that the headline wasn’t perfectly timed to give the market one last chance.
Five percent on the Ten-Year Treasury is the closest thing that I can think of to a “touching the third rail” moment for the market.
Like so many other things that are tied to market sentiment and the psychology of trading, a yield above 5% will cause the market to begin a fresh round of fear-based selling.
By my best technical estimate, a move above 5% (two closes or more) is likely to cost the S%P 500 around 5% in value as it will break back below its 200-day moving average and careens towards round-numbered psychological support at 4,000.
Note that this number is independent of the earnings forward guidance number that I gave you to monitor above.
That’s intentional. Here’s why.
This market is teetering in its current state for a few reasons. Concerns about earnings and the outlook for 2024 are at the top of the list.
All three of these numbers encompass those concerns along with how the market is digesting them.
For now, the seasonality effect is in full force and should be considered a very strong bullish theme.
That said, these three numbers are positioned, and currently working, to undermine the seasonal effect that investors have become almost addicted to as the hope trade continues to burn eternal.
Focus on the data, not the emotions or noise that the market is currently broadcasting.
This, and only this, will guide you in the direction of that 10% move that I continue to direct your attention towards.
To your best trading success,
Chris Johnson
Quantitative Specialist
