Sosnick's chart illustrates the Federal Reserve's balance sheet compared to the S&P 500 (^GSPC). One of the most common phrases one will hear on Wall Street is "don't fight the Fed." Sosnick warns that "we fought the Fed a little bit of late 2021. We succumbed to the Fed in 2022. And we were helped out by the Fed in the March-April period after the banking crisis was resolved. The problem now is, I think we are back to fighting the Fed, and that becomes a trickier situation right now."
Short's chart is a proprietary metric that tracks how many companies report their quarterly results later than they usually do. Short says that research shows if a company reports significantly later than usual, it "tends to be that there is bad news that follows," with the opposite being true if the company reports far earlier. Short's team aggregates the data to get a bigger picture look at what these delays may reveal. Short notes that the index has been ticking higher, indicating more companies are reporting later. Short says it it doesn't work 100% of the time, but about "two-thirds of the time, we find it really does go directionally one way or the other," using UPS (UPS) as an example. Short says the company reported its quarterly results later than usual, and as it turns out, the company reported a revenue miss.
Joining us now to discuss our three contributors to our Chartbook, Steve Sosnick is the chief strategist at Interactive Brokers. Christine Short, VP of research at Wall Street Horizon. And Jay Woods is the chief strategist at Freedom Capital Markets. Thanks to all of you for stopping by today to talk about this.
So Steve, let's start with your chart, and we'll put it up here on the screen. Basically looking at the relationship or surprising relationship, maybe perhaps, between the Fed and the stock market. And maybe you could just walk us through what you're seeing here and what maybe your takeaways are.
STEVE SOSNICK: Yeah, well, thanks Myles. When we look at the chart, we see that the expected pattern of the Fed balance sheet, it peaked about a year and a half ago, and it's been coming down since because of quantitative tightening. But remember, the Fed always talks about long and variable lags. But I think that really is an asymmetric situation. The long and variable lags are when they're taking out liquidity, which is why there was a sort of a-- I'm not going to say a gentle path in 2022 but it was a bit of a delayed reaction.
On the other hand, you look at the spike in that chart on the bottom, on the top line, the light blue line is the securities held on the balance sheet. That's QT and QE. The pop there was the Fed putting $300 billion onto their balance sheet to provide liquidity to troubled banks. Once the banking crisis was gone, the market picked up on that immediately. Maybe not vocally, maybe not obviously, and you'll see the S&P 500 ticked up immediately after that.
The ramifications now are you could see the lines back to where it was before the pump. And so now we're on our own.
MYLES UDLAND: And I guess my question in thinking about this dynamic between QT and the S&P, and it really goes to the question for all stocks all the time is, is there-- a question about the second derivative meaning, since we all know that QT is going to go at a certain type of pace, the S&P has made its peace with it and is sort of looking through that to an extent or is there maybe something else lurking within this as we revert perhaps even to kind of pre-COVID levels of the balance sheet?
STEVE SOSNICK: I think the market's made some peace with it. But remember, rule number one that I was always taught was don't fight the Fed. And to some extent, we fought the Fed a little bit of late 2021, we succumbed to the Fed in 2022, and we were helped out by the Fed in the March, April period after the banking crisis was resolved. The problem now is I think we're back to fighting the Fed, and that becomes a trickier situation right now.
MYLES UDLAND: And of course, in the month of August, never really friendly for the stock market and seeing that over the last couple of days. Christine, I want to talk about your chart, which was one of the more interesting ones that we kind of had in the pack because it was not really something that I had thought about before in a quantitative way. Qualitatively, you kind of think like, if a company changes anything, it must be bad. But walk us through a little bit of what this chart is showing us about the timing of when companies announce their earnings.
CHRISTINE SHORT: Yeah, so this is a proprietary metric we calculate at Wall Street Horizon called the late earnings report index. Basically tracks outlier earnings dates for publicly traded companies with market caps over $250 million. So like you said, a company we've-- many of these, we've tracked for almost 20 years.
So we know for instance, Intel likes to report the Thursday, the Q2 earnings, the Thursday in the 30th week of the year. And some companies really stick to a specific week, a specific day of the week. And so we get a signal when they're reporting way outside of that range, and there's academic research that shows if a company significantly delays their earnings report, well, tends to be that there's bad news that follows in the report and then the stock goes along with that. And vice versa is true, if a company advances their earnings, they're probably out there reporting better than expected news.
And so we aggregate this on a company level. And as you can see for Q3, this Q3 is referring to companies reporting for the Q2 season. That metric has ticked up a little bit. And the closer it gets to the 100, the more worried we get. The 100 is the benchmark. Anything above 100 means more companies are delaying earnings, below means companies are a little less uncertain.
So we're at 95, it's been trending upwards, and it's at the second-highest level it's been since the pandemic. So like you said in your intro, do corporations see something the rest of the marketplace isn't looking at? What are they feeling uneasy about in the second half of the year? And some of these things, yes, inflation is easing, but if you look on a sector level, a lot of the consumer discretionary companies seem to be delaying, which would make sense as consumers soften a bit.
MYLES UDLAND: And I guess maybe another thought around the delay here for companies is that the process of reporting earnings basically begins the day after you report the prior quarter. And so even moving that by a day is a pretty significant lift for the IR team, it's a significant lift for your corporate executives. And I guess as you think about it, I don't know if you guys have a thought around this, but is it more the numbers or is it the story you want to tell that forces you to push back?
I mean, take this quarter for an example, well guys, we don't have an AI strategy yet. Let's take a week and then maybe we can get generative AI into the release a few more times the stock goes up. How do you guys think about that?
CHRISTINE SHORT: Yeah, I mean, all the research shows look, there can be a bunch of different reasons. It could just be a scheduling conflict, it could be a new CFO. So I'm always kind of looking when a company significantly delays or something, I see, did they hire a new CFO? And a lot of times it's like, OK, there's been changes to management and now that person wants to push it a week forward.
Sometimes they just forget to publish it. We've had that our analysts will email the IR team and they're like, are you reporting next Thursday? And they're like, oh yes, we are. Whoops. And they send out the press release. But you're right, a lot of times if they're delaying it's like, is there going to be some accounting manipulation they need to do? They've got to fix the books a little bit here. Are they messaging? Are they trying to figure out how to bring this out to the marketplace so that investors don't freak out? So they're massaging the messaging a little bit.
Are they trying to hide it? They're reporting in a different week, maybe a busier week. And so those are all possibilities. This doesn't work 100% of the time, but I would say 2/3 of the time, we find it really does go directionally one way or the other. And one great example from this morning UPS, a few weeks ago, we reported that they confirmed an earnings date two weeks later than usual, the latest ever since the IPOed. And look at what happened today.
And we knew there was some turmoil in there with the unions and the potential strike which they seem to have skirted. But they reported today they missed revenues and they cut full year forecast. And so that's one that went in line with what expectations would have been.
MYLES UDLAND: Yeah and then I guess we can-- next time, we'll talk about whether you're a pre-market reporter, after-market reporter and how that plays out.
CHRISTINE SHORT: A lot of studies on that as well.
MYLES UDLAND: Yeah, I'm sure. So Jay, I want to talk a little bit about what you showed in your chart and really, you kind of see it again today in the market where you have a big risk event and what's reacting most. Well, the tech sector is reacting most. But you look at what happened with the Dow last year, major outperformer. And it's been an interesting place this year looking at the cyclical thought around the economy right now. We're looking at Dow with Dow transports. Talk us through a little bit about what you're seeing in this chart for the health of the market overall.
JAY WOODS: Yeah, this is old school technical analysis 101 Dow theory. This is a theory that goes back to the early 1900s. And it basically says one thing, when the Dow Jones Industrials, the things that make, and the Dow Jones Transports, the things that take, are doing well. And in this case, both at 52-week highs, yes, we're pulling back today. Yes, we're hitting seasonal headwinds. But they're at 52-week highs, and they're within 5%, 4% roughly of all-time highs. This is a bullish development, and it's something we have to watch.
The first half of the year was all about tech, and it was all about the Magnificent Seven leading the way. Now we're seeing a healthy rotation. The industrials broke out, the transports are doing well. We focused too much on the airlines, but these are price weighted indexes. The airlines aren't really a big weighting, what you're looking at is Old Dominion. You're looking at some of the railroads that are doing well, you're looking at Avis Rental Car, Symbol car that have been doing well and leading us higher. Yes, UPS is taking us a little lower today but FedEx has been doing extremely well.
This is what I want to see, and this tells me that the economy is clicking. It's not just the tech sector but it's the industrials, it's the transports. And now they can pull back, this is a healthy correction. But I think the uptrend is intact, we're over 20% off the highs. And you have to pay attention to old Dow theory. It proves time and time again we're in a bull market.
MYLES UDLAND: Now, I'm curious how you think about the Dow. I mean, you kind of walked through the history around it. But the question is always, well, there's not a ton of money benchmarked to the Dow relative to the S&P, but it's certainly something that traders and money managers look at for the signal it sends to the market. So how do you think about the Dow and the transports in that context where you know it's something people watch, it's not something that there's trillions of dollars bet against, but it's still kind of factors into that question for the market.
JAY WOODS: Yeah, and that's a great question. And historically, if you were to put up the Dow and the S&P 500, I'm perplexed by this, but they trend the exact same way. We're talking 500 stocks versus 30. The index just has a way of rotating, and we're seeing that again and again. Health care is starting to come back, Amgen looks great, UnitedHealthcare, the biggest weighting in the Dow, is starting to make a move. If that breaks out and continues to rise above its 200-day moving average, the Dow is going to go higher.
Boeing just broke out one of the bigger industrials in that average. This is good. When Walgreens Boots Alliance doesn't do well, it's a $30 stock. Intel, $30 stock. Who cares? You have to look under the hood, look at the leadership, and it's the same thing with the transports. I mentioned the airlines are weak, you want to watch some of the rails that are doing well, some of the shippers.
And talking with shippers, Kirby and Matson, no one even knows these stocks. But the stocks are making 52-week highs. Kirby based out of Houston and Matson, a Honolulu, Hawaii company making 52-week highs and $95 number. These are the things that are going to lead, and these do shape the economy, but people don't talk about it.
MYLES UDLAND: And so I guess the last one then for you, Jay, just thinking about the market, you mentioned the Magnificent Seven, which kind of led the market this year. How focused were you? And I guess, do you remain through the balance of the year on this notion of broadening in the rally? And we saw it June to July. We saw materials, we saw industrials doing a lot of the heavy-lifting there to get the market within shouting distance, really, of a record high. How are you thinking about the breadth of the market at this point in time?
JAY WOODS: Yeah, I love this. We're seeing weakness in Apple and Microsoft, who had great quarters. What are they doing? It's a natural pullback. The Apple pullback is a little farther than I expected, but we're catching up with the other sectors. So the rotation theme continues. You mentioned materials, they look great. And if health care can catch up, then I think we're poised to do well on the Russell.
The Russell 2000 had the strongest June and July of any of the indexes, and it continues to broaden out. So to me, this is healthy. When you have the leaders finally taking a pause and everyone else catching up, this is a sign of a healthy market.
MYLES UDLAND: There you go. Just don't tell the Russell 2000 about the regional bank comment from Moody's today otherwise, it'll be totally fine. All right, Jay, Christine, Steve, thank you guys so much for joining today. Thanks so much for your contributions to the Yahoo Finance Chartbook. Really fun to see all these thoughts all in one place. And of course, everyone can find that on our website and anywhere you get your Yahoo Finance news. Downloadable PDF as well.