I Still Call It The OK Market

It was a very eventful week with all the economic readings and the earnings releases from 4 of the Magnificent 7. The GDP was not OK, the PCE was OK, and the employment numbers were OK. So overall, on the economic front we ended in a reasonably OK spot. The earnings are also coming in reasonably OK and mostly above expectations. Although the expectations were lowered and most companies are not providing much forward guidance.

On earnings, here are the latest highlights from Factset.com:

“At this stage of the earnings season, the S&P 500 is reporting strong results for the first quarter. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages. As a result, the index is reporting higher earnings for the first quarter today relative to the end of last week and relative the end of the quarter. The index is also reporting double-digit earnings growth for the second consecutive quarter.

Overall, 72% of the companies in the S&P 500 have reported actual results for Q1 2025 to date. Of these companies, 76% have reported actual EPS above estimates, which is below the 5-year average of 77% but above the 10-year average of 75%. In aggregate, companies are reporting earnings that are 8.6% above estimates, which is below the 5-year average of 8.8% but above the 10-year average of 6.9%.

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the first quarter is 12.8% today, compared to an earnings growth rate of 10.1% last week and an earnings growth rate of 7.2% at the end of the first quarter (March 31).”

As we all know, earnings are the primary driver for the stock market performance. The inflation rate and the interest rates are some of the important inputs that impact the earnings. But at the end of the day, if companies show growth in earnings, the stock prices will rise.

Note that the stock market trades based on future expected earnings. And that is the reason, because of tariffs, there was expected to be a shadow on future earnings. Over the last couple of weeks, due to the somewhat backdown in the tariffs posture, the stock market seems to be feeling a little better. There is more of a belief that these high tariffs will not stick.

Having said that, there are enough “doom sayers” who are predicting and declaring that the damage has already been done. There could be some truth to it as we know that supply chains cannot be implemented, reversed or changed with the flip of a switch. So, actions that companies may take due to the potential tariffs may take longer to reverse and so we may see some negative impacts already.

That is conjecture, though. And I cannot trade on conjecture and hypothesis. I can only trade based on what I know. What I know is that the trending has improved dramatically from the initial reaction to the tariff announcement aka “Liberation Day”.

As a trend follower, for me price action is everything. And price action has been good. Actually, it has been extremely good. Here is how the trending heat map for the major market index ETFs looks like right now.

Even the small cap (IWM) and the mid cap (MDY) have caught up to the SPY and QQQ which are usually the leaders. So, this has been a broad-based recovery.

The SPY is actually sitting on a 9 straight up day in a row. This is quite rare, and I think if it is up Monday for the 10th day in row, it may be some sort of a record. The daily chart of the SPY shows this huge momentum to the upside.

Many pundits and experts are talking about this is too much too fast. Maybe so. But who am I to argue with Mr. Market? The market will do what it does. There is some data out there that the professional traders have sat out this run and it has been run by retail traders only. Maybe so. But that does not matter. What matters is price action and nothing else.

I do agree it is a big fast jump. But I do not know if this is it and price will go down from here. And there is no way for me to predict if Monday and the next week price will go down. I will only know it when I see it.

Right now, the price is above the 5-day (white), the 10-day (green), the 20-day (red) and the 50-day (purple) moving averages. If and when price starts to go below these moving averages, I will know that the tide is turning or has turned. That is when I will step out of my long positions.

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The SPX sectors trending has also improved quite a bit.

We can see that for 5 of the 11 sectors - XLC, XLF, XLI, XLP and XLU - price has risen above their 200-day moving averages. It seems that should be good momentum to that the SPX itself over the 200-day moving average as well.

Another way to look at trending strength is to see which sectors are driving the stock market up. Are they the risk on sectors or are they the defensive sectors. The below table shows the returns for the SPX sectors over the last week.

We can see that the top sectors are XLI, XLK and XLF which have all returned well over the SPX return of +2.92% for last week. And all 3 of these sectors are risk-on sectors.

The bottom 3 sectors are XLP, XLV and XLE which are known as the defensive sectors. Though XLE is it its own thing and the correlation with SPX is very low.

Another metric I track is the number of underlying stocks for the major markets that are above their 20-day moving average.

These are the highest percentages over the last 5 months. This is good. Note that I track for only the 20-day moving average whereas many market statisticians also track for the 50-day and the 200-day.

Certainly, when we see 88% of the underlying stocks of the SPX and 94% of the underlying stocks of the QQQ are over their 20-day moving average it makes one wonder if we are already overbought.

So, are we overbought? I would say no based on the RSI readings. The SPY RSI is at 59 and the QQQ RSI is at 60.

Based on their proximity to the 200-day moving average and also the fact that they are close to 100% retracement from the low to the recent high, I would say there could be some “contending” with resistance levels coming up. And we will have to see how price deals with these resistance levels. But, as stated earlier, by no means am I closing my long positions yet. Next week may or may not change that. I will know when I see it.

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Bitcoin

Price action has been positive of late. In fact, I would say that the Bitcoin price action was the first indication that we may be going to a risk-on situation at least in the short-term. Here is the IBIT daily chart.

We can see that the trending is perfectly bullish. Since Bitcoin trades 24x7 I was expecting to see strength over the weekend in the spot price. But, as of this writing (Sunday afternoon) price is languishing. Maybe the whole paradigm has shifted and Bitcoin shows its strength during stock market open hours now. We shall see if Bitcoin can use the recent strength and rise over the 100k mark again.

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Gold

We can see from the daily chart of GLD that price has just gone below the 20-day moving average. It is not a crisis or a calamity - just an observation that the momentum has stalled. I am no longer long the GDXU which I rode for a while.

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Magnificent 7 + Friends

I track these 11 stocks because they cover the MAGS and the FNGS. I trade the FNGA which is the 3x leverage of the FNGS.

Out of the above, only NVDA and CRWD earnings remain to be declared. AAPL has been the worst performer post earnings and MSFT has taken over the mantle of the most valuable (by market cap) company in the world.

I will mention that NFLX has the best-looking chart. It is a thing of beauty.

The RSI is at 76 indicating somewhat overbought levels. So, not sure it would be a good idea to chase it now.

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Lastly, I hope like me, you all are taking this tariff and trade business somewhat lightly. Maybe, even a little humorously. If you are following some of the memes in social media, you cannot but find a lot of this funny. I take it with a lot of humor because there is no way for me to impact it. It does not matter that I do not agree with the action or how the actions are being taken. I can only take my own actions to make sure the impact to me and my family and near and dear ones is not negative. So, do smile and laugh a little. Trust me, it is a lot better than getting emotionally charged about it.

Have a great week ahead.