Hope Will Meet Reality, For Better Or Worse

2016 is not over yet, since Q4 earnings will be reported through to March. Today, expectations for earnings and revenues growth stand at +2.6% and +4.2% respectively, down from the September 30, 2016 estimates of +5.0% for each. Since September 30, the S&P 500 has risen 4.9%, which is a significant divergence from the trend in lower fourth quarter estimates. The downward revisions to forecast-ed earnings and revenue growth clearly haven’t bothered the market.

All the stock market gains came after Election Day (November 8), with market participants celebrating the idea that earnings growth will pick up in 2017 on the back of deregulation, tax reform, and infrastructure spending promised/implied by the Donald. It seems that the stock market has written off the fourth quarter results and has its sights set on Q1 and the rest of 2017.

Hope of a profitable future has been baked into the stock market. Hope will eventually crash into reality, for better or worse. If the basis for the hope (tax cuts etc.) do not materialise, and let’s face it, the Donald is nothing if not volatile and unpredictable, then this nose-bleed market will reprice itself according to the new reality.

Equities

The put-to-call ratio (8 week moving average) continues to trend down and won’t signal a market top until it turns back up (chart below).

Down spikes in the VIX correspond to S&P 500 tops; the VIX remains at an extremely low level (chart below).

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Gold

Gold has rallied on the back of the correcting dollar and lower Treasury interest rates (chart below). The dollar is now in a support zone which should limit further downside, and gold has probed and turned back from the $1200-$1220 resistance zone.

The commitments of futures traders have started to turn this week: commercial traders increased their short position from 69% to 70%, and the large speculators increased their long positioning from 65% to 67%. At the moment, these levels are supportive of further downside for gold (chart below).

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