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Why the S&P may already be in a bear market

The moment they knew they were cooked.

Remember the third quarter? As a refresher: It was nasty. Nastier than a Matt Harvey slider (pre-9th inning). The worst quarter in four years. The market seemed to have finally surrendered itself to the bears. A rebound didn’t appear to be in the offing, either. Then October happened, and it was scary good.

The best month in four years quickly erased the memory of the dog days, with a 9% pop on the major indexes. Earnings have given investors a nice little boost, as beats have resulted in those stocks rising by an average of 2.2% in the surrounding four-day period, according to some CNBC number-crunching. That doubles the 1.1% advance a positive surprise typically delivers. At the same time, earnings disappointments haven’t been punished as much as they usually are.

Now we move to November, where big results from big names like Disney DIS, -1.13% and Facebook FB, -2.77% will have a chance to keep the bullish earnings trend intact — at least until Friday, when the stock market will have to absorb the latest jobs tally.

“For reasonable equity market returns to be achieved over the next twelve months, a lot will hinge on earnings growth in the fourth quarter and first half of 2016,” said David Templeton of the Horan Capital Advisors blog, who is skeptical on the short run, but bullish on the long run. “At worst, the currency headwind should lessen and the consumer should benefit from lower energy prices.”

Speaking of currency, our call of the day says the dollar’s relationship with the S&P is sending off a bright yellow warning light right (more on that below). Then again, using the vaunted “Mets Indicator,” investors are likely screwed, regardless:

Key market gauges

November doesn’t feel much like October in the early going, with futures for the Dow YMZ5, +0.04% and the S&P ESZ5, +0.02% showing little change. China may be keeping a lid on things after manufacturing data that didn’t seem to make too many people happy, leaving Asia ADOW, -1.13% lower, and the Shanghai Composite index SHCOMP, -1.70% down around 1.7%. Any hint of China weakness is usually bumpy for crude CLZ5, -1.70% CLZ5, -1.70% which is off more than 1%. Europe SXXP, +0.39% is mostly up, and gold GCZ5, -0.41% is keeping with the red mood, down just a bit.

Earnings

We’re about halfway through earnings season, and yes, it’s been a pretty good spell. That could all change this week with energy companies stepping up with what’s expected to be a 65% drop in profit from last year. Tesla TSLA, -2.22% joins Facebook and Disney as the sexiest names to report, but before those hit, we’ll hear from American International Group AIG, -0.68% and Visa V, -1.18% today. Check out MarketWatch’s Earnings Wall.

The call

The S&P’s performance relative to the U.S. dollar DXY, +0.01% is a good indicator of bull and bear markets, according to Geoffrey Caveney of the Dr. Strangemarket blog, and right now it’s telling investors that trouble is lurking. He says the stock market has been on a steady decline against the buck for the past 16 months.

Basically, the ratio — the value of the S&P 500 index divided by the value of the Dollar Index — tends to stall out a year in advance of a bear market. It...


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