Earnings are improving. Here's why markets aren't cheering them on

Pisani: Earnings good, but market still 'crummy'

Earnings season just hit the halfway mark and the news is good. The earnings recession is over.

Third-quarter earnings are up 2.6 percent, the best quarter since the fourth quarter of 2014, according to Thomson Reuters. Some companies — particularly banks — have beaten earnings expectations by much wider margins than usual. Revenues are increasing too, up 2.7 percent, the first increase in the last six quarters.

So why aren't the markets cheering? The 500 has fallen 1.4 percent since the start of earnings season in October, the worst monthly showing since January. The only sector with a notable gain is financials.

What's going on? I don't think there is one cause, I think there's several issues that collectively are weighing on the markets:

1) Investors are nervous about Q4 earnings and global growth prospects.

"There's been some real nervousness on the part of investors," David Aurelio of Thomson Reuters said."Traders seem suspicious of the health of the markets."

He's right about investors, but companies and analysts seem less pessimistic than normal about the current quarter. Expectations for financials have really improved, for example.

The exception is industrials, where many companies including Caterpillar, Ingersoll Rand, and Parker-Hannifin have lowered expectations due to slower global growth.

2) Oil is not cooperating. That poses a major problem.

Remember, the trading community has convinced itself that oil will be in a new trading range of $50 to $60 going into 2017. But after a brief breakout earlier in the month, oil is staying stubbornly in the old $40 to $50 range and seems in no hurry to break out. As a result, the SPDR Oil & Gas ETF (XOP), a basket of oil exploration stocks, is down 4 percent this month.

3) The election is affecting key sectors. The standard narrative is that markets are set for Hillary Clinton to win the White House and the House to remain Republican.

Fine, but Clinton's strong stance on regulation of the drug and energy industries are clearly an overhang for those segments of the market. The PowerShares Dynamic Pharmaceuticals ETF (PJP), a basket of pharmaceutical stocks, is down nearly 6 percent this month even though earnings from the group are generally above expectations.

4) The looming Fed rate hike. This may be the biggest problem of them all.

The only major mover of volatility this year has been the Fed. Not the elections. For the most part, not Brexit or even the ongoing European banking crisis has driven extended volatility. What traders see now are 10-year Treasury yields at their highest levels since June, banks outperforming and interest-rate sensitive names like REITs and telecom down notably this month.

Speaking of volatility, whatever happened to "October is the most volatile month of the year?" With two days left in the month, it's another bust for traders praying for volatility to spike up the trading action. After a brief spike, volatility collapsed right after the Fed meeting on Sept. 21.