October 26, 2020
CQ3: This week is the busiest week of Q3 earnings season with ~33% of the Russell 1000 reporting. Just over 25% of S&P 500 companies have reported thus far, with 84% beating consensus by an average of +17.2%. This compares to five year averages of 73% beating estimates by only +5.6%. While Q3 earnings is shaping up to be much better than expected, options market pricing implies the upcoming election may be overshadowing results as most companies reporting positive earnings have failed to realize their pre-earnings implied volatility. Markets are also forced to contend with associated fiscal stimulus implications and potential vaccine headlines in the week(s) ahead.
Focus: CQ3 results are coming in better than expected and financial conditions remain extremely easy, so it’s best to maintain a bullish bias despite apparent macro risks ahead. Given the potential high stakes macro uncertainty, we’ve decided to sharpen our focus on indicators and technical factors. We’ve been using ~3400 as near-term SPX support. The SPX is currently trading below this level, but the close is what matters most. A break below 3400 leads us to secondary support at ~3295. A break below that level could lead to momentum selling down to ~3220 with several CTA triggers in a tight cluster just above ~3300. There’s a high likelihood for these upcoming macro events to impact the near-term risk/reward tradeoff between value and growth. We’ll take near-term cues from the relative outperformance of value over growth with S&P 500 Value Index (SVX) levels above ~1180 as a trigger.