Bullish sentiment has come on strong this month – never mind that we are still in a bear market. That label has become somewhat of misnomer for some, especially given good results so far this year. Bear markets don’t last forever, and we are probably more than halfway through this one.
Just look at recent price action. It has been strong since the start of the year; supporting technical indicators have been, too. But while the bullish pundits and experts have declared the bear market over, I am loath to join that particular crowd. This bear market has taught us many times that jumping in feet first is not the best action.
With that said, we have a lot of signals to watch, starting with earnings season.
Earnings season may support bullish sentiment
This week will bring us a massive number of Q4 earnings reports. Analysts have been pruning down growth estimates, which will make the bar much easier to hurdle over. Listen carefully to management on their earnings calls. I suspect most companies will talk about the challenges ahead, including economic headwinds, layoffs, and the struggling consumer. December retail sales showed us that the consumer was not in the holiday spirit; numbers fell sharply from November. Plus, pricing pressures, which seem to be abating per the PPI, may show companies have better pricing power than first thought.
In the end, earnings growth rates matter the most, and if a company is not growing – or does not expect to grow – investors will hit the sell button. I do wonder if poor results are already priced in, though. Last week, Netflix issued a terrible earnings report and only delivered lukewarm guidance for the future, but the stock ran up 8% the following session anyway.
Stocks took a huge hit in December, likely in preparation for a weak earnings season. But not every stock has seen a price drop. Maybe the strong bullish sentiment we are seeing now can carry stocks across the finish line, at least for January. However, we have seen markets rally to resistance (like now), only to get rejected by the sellers. Until they cross resistance and keep moving higher, the bear market will live on.
