It is earnings season again

With second quarter earnings report starting today, this week could be extremely volatile. It is always the major banks that lead the way. Among the major corporations we have JP Morgan, Citi, Wells Fargo, and Delta Airlines reporting today. Expectations are much lower from last quarter and this is a perfect opportunity for institutions to right down their loan losses as they can look to the future with better hope.

The Fed has created the perfect opportunity for the banks, but will the banks take the risks and will the economy cooperate? That’s the million-dollar question. The Fed has eliminated the reserve requirements for the banks taking the ratio from 10% to zero. The Fed is also a buyer of corporate bonds and interest rates are close to zero. The market is flooded with liquidity. The risk is for a better earnings number now.

Tesla is almost ready to be included in the S&P 500. All it needs is four consecutive quarters of profits and this could happen this Thursday when they report their figures.

Nearly 10% of Tesla is shorted by the markets amounting to about 20 bio dollars. If Tesla do surprise the markets and report a profit which they have done in past quarters, the short sellers will be in more pain. If they join the S&P 500 many index tracking and exchange traded funds will be buying the stock forcing the short sellers to buy as well. It had a big fall yesterday but can Tesla surprise the markets to catch up with Amazon. For the way it has performed so far, do not think it is worth betting against it. Let’s look at the broader markets.

Equities

What’s unique about these markets? Five major tech stocks have driven the markets higher namely Apple, Amazon, Alphabet (Google) Microsoft and Facebook. The S&P 500 is a market cap weighted index. Therefore, the rise in prices are more pronounced. In the Nasdaq it is all the above stocks plus Tesla which has had a spectacular run.

While we have highlighted the divergences in all the major indexes, the option data are dancing to similar extremes at previous highs. The 10-day average of the put/call ratio fell to its lowest level in 10 years. We repeat again bullish sentiment is at an extreme level.

Yesterday the markets made an intraday extreme to 3235 in the S&P exceeding the closing high of 3232 on June 8. But the fall from its highs closed to almost 90 points. Before that the market tried to break above the 3167 level for weeks. Finally, it did that yesterday in a major way and has closed below 3167. It says a lot about this market.

Bonds

Nothing special to add on Bonds from the last report.

Euro

The near-term patterns in Euro are very confusing. Will stick with the critical levels that we have outlined in past reports.

Gold

Not many changes in Gold but a close below 1790 should give us more confidence.