On Fridays, my column is divided into two sections. The first uses the long-leading, leading, and coincidental indicator methodology developed by Arthur Burns and Geoffrey Moore. The second looks at the broad market averages.

Long-leading indicators

The earnings picture so far is positive. From Zacks (emphasis added):

The third quarter results reconfirm the steadily improving earnings outlook that we have been highlighting since early July. We are seeing an above average proportion of companies beating Q3 estimates and expectations for the current period (2020 Q4) are going up.

For the 206 S&P 500 members that have reported Q3 results already, total earnings are down -11.3% from the same period last year on -3.5% lower revenues, with 83.5% beating EPS estimates and 78.2% beating revenue estimates

Remember that companies tend to be very conservative when they predict earnings to increase the possibility of an upside surprise when they report their data.

The credit markets are liquid and have little stress:

The Chicago Fed’s Risk Index has returned to low levels.

Leading Indicators

This week, the Census released the latest durable goods data. For our purposes, this report contains two key numbers:

New orders of consumer durable goods (left) dropped modestly. But the total number has completely recovered from its pandemic lows. New orders for non-defense capital goods (right) is at a 5-year high.

Building permit data for 1-unit homes is at a five-year high.

The yield curve (left) is positive. Despite this week’s weakness, the stock market has rebounded (right).

The biggest problem is still the labor market:

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The 4-week moving average of initial unemployment claims is still slightly higher than 100,000 above its peak from the 2007-2009 recession.

Coincidental Indicators

This week, the BEA released two key reports. The first is GDP, which rebounded strongly. Let’s look at its sub-sectors, starting with investment:

Two categories of investment increased strongly: equipment (in blue) and residential (in green). IP (in red) didn’t drop that much to begin with, so it didn’t have to rebound as strongly. Structural investment (in purple) is still contracting.

Exports and imports of goods (blue and green, respectively) rebounded strongly. Services, however, were a bit weaker in the latest report.

Federal spending (blue and red) was much weaker in the third quarter, as was state and local government spending.

Economic conclusion: the data is mostly positive. The financial markets have rebounded and credit markets are liquid. Most data is moving in the right direction. However, the labor market is about to start a period of slower growth.

Let’s take a look at this week’s performance tables:

All the indexes were off. Micro caps were down nearly 7%; the Dow declined 6.5%; small caps dropped 6%. Treasuries didn’t gain, which is a bit odd. Ideally, bonds and stocks move in opposite directions.

At the bottom of the chart are health care, tech, and consumer discretionary. These three sectors comprise some of the largest percentages of the SPY and QQQ, which explains why the larger caps dropped.

I’ll be doing a more in-depth review of the market in my weekly ETF review. For now, let’s look at this week’s SPY chart:

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SPY 5-day

Prices moved lower in three sections. On Monday and Tuesday, prices clustered in the 335-342 range. The index gapped lower on Wednesday morning and formed a reverse head and shoulders on Wednesday afternoon and Thursday morning. But prices couldn’t get above the 200-minute EMA on Thursday afternoon. The SPY trended lower on Friday AM and trended sideways for the rest of the session.

The big takeaway is that the longest rally was from Thursday’s open to Thursday’s close. That tells you how bearish the tone currently is.

Have a good and safe weekend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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