Forget earnings—watch the US dollar and crude oil

Halliburton kicked off energy sector earnings this morning with modest beats off already beaten down expectations. It’s more of the same for the financial sector, which Morgan Stanley just rounded out with surprises of its own.

But all these numbers are backward looking. Forward guidance is strengthening and beginning to price in two of the biggest fundamentals that matter right now: the US dollar and crude oil.

Lowered expectations

The bar was set so low for Q1 and Q2 earnings this year that the US stock indices have been able to run with modest beats while shaking off bad news all summer. (This is the first summer there hasn’t been a major decline since the beginning of this seven-year bull market.)

The pessimism was predicated on two factors that dragged risk markets down in the second half of 2015: a strengthening US dollar and a precipitous drop in the price of crude oil. Both accelerated an already weakening market in Q3 2015, which finally reversed early this year.

Because of those nasty quarters late last year, they’ll be easier to beat this year. Hence, the raise in forward guidance, supported by a strengthening labor market that translates into more consumer spending.

Even the increased chance of a Fed rate hike isn’t spooking the markets. Rather, banks—whose margins have been squeezed by ultra-low interest rates for 8 years—are putting a bid on the indices.

Here’s the technical picture for oil and the US dollar

Crude oil has also been consolidating, with $45 per barrel (basis August futures) serving as strong support. A break downward points to $40 a barrel. This would cause concern for the energy sector, but as long as it holds, it shouldn’t be a disaster. Oil needs to climb above $50 and stay there for a quarter to turn around the sector, according to various industry analysts.

The US dollar index broke through key resistance Tuesday after a multi-week consolidation. This is a very solid technical setup that favors an additional 3.5% rally into the 100-101 area, which just so happens to be the 2015 highs. At that point, it’s do or die. If the dollar breaks through, it could generate enough momentum to rally to levels that drag on the US economy.

Yves Lamoureux, president of macroeconomic research firm Lamoureux & Co., is a self-described dollar super bull and believes there is too much complacency in the foreign exchange markets.

“There is this sense now that because we have gone sideways for one year that nothing can happen in the FX world. That is so absurd. People thought the same about the British pound, and now the pound is being pounded. Our proprietary model shows global liquidity to be contracting in the same fashion as the early 1980s. This is what dictates our bullish view of the US dollar,” says Lamoureux.