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Just over a month ago, the outlook for the earnings season was not very good, but for those who have followed the market through the current bull market, this is not surprising. It seems that those who try to project earnings often take a too-cautious outlook.

In June, analysts at FactSet estimated the decline in earnings for Quarter 3 would be 0.6%, but by October 4, the estimated earnings decline for Q3 was -4.1%. This shows an increase in economic anxiety over the past few months and an unclear reading on the health of the economy. Before the start of earnings season, Bloomberg Opinion analysts commented that “Recession Fears Are Seeping Into the Stock Market”. Then just before the start of the earnings season, the Financial Times wondered “Just how grim will the US earnings season be?”.

But with all that doom and gloom, so far, things are actually looking fairly rosy. Last Thursday was the busiest day of the earnings season, with 45 S&P 500 companies reported earnings. Of the 38% of S&P companies reporting, 78% have exceeded the earnings forecasts, according to FactSet.

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Once again, it's clear that trying to invest or trade based on fundamental data (like earnings) can be a difficult path. Despite the low expectations for earnings, stocks were strong again last week.

For the second week in a row, the Dow Jones Transportation Average and Russell 2000 Small Cap Index led stocks higher, up 3.31% and 2.99%, respectively. Both are still slightly below their YTD high readings from April 26. The Nasdaq 100 Index led the S&P 500, last week which was predicted by the relative performance analysis last month.

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The Spyder Trust (SPY) closed just above the prior high from September at $299.84, and not far below the all-time high of $302.63. The weekly chart resistance (line a) is now at $305.03, with the weekly starc+ band at $313.74. The weekly volume in SPY of 237 million was below the 10-week average of 367 million and was the lowest weekly reading since early July. Typically in a strong uptrend, the volume will be expanding, not contracting.

The S&P 500 Advance/Decline line made a marginal new high again last week. It is still well above its strongly rising Weighted Moving Average (WMA). The On Balance Volume (OBV) has rebounded to its WMA, but has not yet moved above it. The OBV needs to overcome the bearish divergence resistance (line b) in order to turn positive.

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The American Association of Individual Investors (AAII) bullish sentiment declined from 33.13% on September 12 to a low of 20.31% on October 10 (point 4). Since then, it rebounded last week to 35.6%.

Low bullish % numbers (specifically in the low 20's) indicate a possible swing to the upside. Over the past six months, sentiment has been shifting pretty quickly, corresponding with swings in the major market averages. The last such low in the bullish % was August 8, when it fell to 21.66% (point 3), and before that in June, when it hit 22.53% (point 2).

The rising bullish % conflicts with the results of an October 11 E*Trade survey of experienced investors where the bearish outlook on the stock market and economy rose 11% since the last quarter. They identified trade conflicts and a recession as the biggest threats to their portfolio. Over half of those surveyed thought that the economy had peaked.

With another Federal Open Market Committee meeting fast approaching, the main questions facing the stock market and investors are: will the FOMC cut rates? And if they do, will it be because the data justifies it, or because of political pressure exerted by President Trump?

The increasing bullish sentiment over the past few weeks makes the market more susceptible to a correction, especially with the market averages at all-time highs. As we head into another FOMC meeting this week, there is some debate as to whether the stock market averages can break out to convincing new highs, or whether they will suffer another rally failure.

My analysis last month “Will The Fed Rate Cut Stall The Market's Rally?” was posted a few days before the FOMC cut rates on September 18th. There was some technical deterioration ahead of the FOMC meeting, but it was my concern that “with so many investors and pundits calling for a larger rate cut, I feel that a 0.25% cut could disappoint the markets and likely stall the rally in the financial stocks”. The Invesco QQQ Trust (QQQ) subsequently declined over 6%.

Over the past few years, there have been several times when the market’s initial reaction to the FOMC meeting has been reversed the next day or even several days later. In September, the market continued higher for a few days before it did turn lower.

I feel that the same could happen this month. It is also possible that the FOMC will cut rates, but make it clear that future rate cuts are unlikely, which I think will also lead to investor disappointment.

Therefore I would recommend that you have a plan in place before Wednesday afternoon’s announcement. The bullish weekly and monthly readings from the advance/decline analysis indicate that, if there is a market decline, it will be well supported. The correction in September was also a buying opportunity. Of course, a 2-4% market decline should also reduce the bullish sentiment.