How To Fix Your Screen When It Turns Upside Down

Earnings are better than expected, the indexes won't budge and half of investors haven't seen a correction in a year while the rest have seen their stocks go down. What's up?

By HELENE MEISLER

Aug 05, 2021 | 06:00 AM EDT

This earnings season has been an interesting one. The reason I say that is because I saw some statistic that more than 70% of companies thus far had reported-better-than-expected earnings. That might be a bit of companies managing expectations, but, even so, I have seen several strategists raise their earnings on the S&P 500 for 2022.

Whether companies were managing expectations or not, clearly earnings estimates for next year are going up. Yet, so many stocks have reacted poorly to these earnings. I mean, if earnings were so much better than expected, shouldn't we see more than 200 stocks making new highs? Yet we don't.

Yet the indexes can't budge. The S&P and Nasdaq are pretty much where they have been for two weeks now, since we entered earnings season.

There is another thing I have noticed. Half the folks out there think the market hasn't had a correction in a year. The other half stare at stocks they own that are down double-digit percentages and wonder what the first half is talking about.

But we are in a market where a handful of stocks control the indexes and while that handful might have missed or beat earnings, most of those stocks are chopping about, which means the indexes are chopping about. Even the awful small caps have been trapped.

So we have market breadth that looks like this: The blue line is breadth and the brown line is the S&P. The blue line hasn't made a higher high since early June. It sat out the last rally, or maybe the last two rallies.

Then we have the transports, which have been correcting since May. Yet they don't-or at least they haven't yet-managed a meaningful whack but rather it's a slow drip. More of a dribble, wouldn't you say?

I am certain any day now we'll hear what we heard in January 2020: The semiconductors are the new transports. Of course we didn't hear that all year when the transports were screaming higher and the semis were tumbling. Folks sometimes just like to make up narratives.

In any event, we have a market that is sloppy, but refuses to give us a good whoosh. We have a market in which the stocks making new lows is expanding, but not yet beyond where they were a few weeks ago. New highs can't seem to expand, either, which indicates very little buying interest.

And let's not forget the banks. As much as they can't go up, they too just sit here. They are the same place they were in June when interest rates were at 1.50% on the 10 year. Yet rates are much lower now (1.17%) and the Bank Index isn't much lower.

The Daily Sentiment Index for bonds is still at 88. Nasdaq too is at 88, leaving a short runway for both. But now the DSI for the volatility index is at 17, so it's starting to look like August could get volatile instead of the sideways action we've had the last two weeks.

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