Once more into the breach

Welcome Back My Friends to the Show That Never Ends . . .

A painless pre-announcement period has ended and a new earning season has begun.. We start off earnings with a benign negative-to-positive surprise ratio of 1.7, which compares favorably with Q3 2002 ratio’s of 2.1. From that good data point, we jump right into the meaty part of earnings season this week.

While it may seem as though last quarter’s earnings season ended just a few days ago, it actually was a couple of months ago (trust me on this).

This quarter is widely believed by analysts to be the best Q of the year for earnings growth. Corporate reports – with a few exceptions such as Jobs data – will be the key driver for the markets for the rest of October, in our opinion

Several smart people we know are asking the question “How much of this good news is already baked into stock prices?” But that suggests an almost too rational approach to investing; Mr. Market prefers to maximize the confusion for the greatest number of people, and that may mean defying expectations for a pullback for a while longer.

Our thesis has been (and remains) the battle between “Tide versus Wind.” With historical levels of stimulus – and the big institutions still lagging the indices – we continue to see a large mutual fund appetite for equities.

Waiting for a pullback has been the recipe for under performing, thus, the panic-stricken beta chase continues. That is significant asfund managers (and the institutional community in general) have been relatively slow to change their outlook. Their belated Bullishness continues to be revealed in the market internals.

As all this unfolds, we cannot help but notice that the market remains particularly healthy. We especially want to note the breadth (discussed last week) as particularly revealing of institutional interest in equities. Two key factors: 1) Broad participation of nearly all stocks indicates that this rally is not merely another instance of sectional rotation, but rather involves broad based buying; 2) This implies institutional – not individual – equity accumulation.

What does this mean to Investors? The distributive period of 2000-2002, which saw relentless institutional selling, has been replaced with an accumulation phase. In our opinion, we can expect to see buying pressure remain for an intermediate period (30-90 days) of time.

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