"When trust improves, the mood improves." -- Fernando Flores

The Creature

We've talked a lot about the threats to the financial marketplace. Not just politics, but geopolitics, macroeconomy and, surely, monetary policy are all avenues of attack against which investors must be prepared to defend themselves. Remember two grenade sumps per fighting hole. The one item that inspired as much confidence to keep these markets supported at levels still close enough to record highs has been a consistent belief in improving corporate performance. Earnings season kicks off unofficially next week, when the banks start spitting out their data. Overall expectations for the S&P 500 are for an earnings increase of over 9% for the first quarter of this year over the first quarter of 2016. You probably know that. This, if realized, would be the strongest year-over-year gain in this space since 2013, and could go a long way toward equities justifying their seemingly expensive valuations.

There's more. Aggregate S&P 500 revenue is projected to have grown 7.1% for the quarter year on year. That would be the best performance for revenue (mega-important) since 2012. What could go wrong? Simple disappointment. That's the creature in the closet. We've all seen a consumer who feels so confident that he or she is unwilling to spend their own dough. I don't vilify that behavior. Not one bit. I simply am concerned that models based on past correlations between confidence and spending just may not be there. We've spoken about changed patterns of behavior and rising debt delinquencies just this week. On top of that, this 9% projection for the quarter started above 12%. Analysts ratcheting down expectations once the prom date approaches is not unusual, but shaving more than 25% off of growth expectations does require the prudent investor to adopt some defensive positioning.

If earnings and/or revenue fail to fill out this oversized T-shirt hand-me-down, then traders will be forced to either place all of their hope on expectations for sooner, rather than later lower taxes, fiscal spending, and deregulation, or they will fall back on something closer to fundamental valuations.

(Be sure to tune in today at 11:00 for the free monthly roundtable "Trading Strategies" in which I take part, discussing how investors should be positioned with Jim Cramer and three other market experts.)

Glenn Miller

Ever wake up in the mood? In the mood to give the central bank a piece of your mind? Yeah, me too. As you must know by now, yesterday Jeffrey Lacker resigned his post as president of the Richmond Fed ahead of his expected retirement in October. Mr. Lacker regrets that he apparently may have confirmed information during a telephone conversation with an analyst in 2012 by simply not commenting on something said. It gets worse. Lacker, in his statement on the issue, seems to have not disclosed this accidental exchange between himself and this analyst to the FOMC's general counsel who originally investigated the issue, but that he did during the follow-up interview in 2015.

Changing Currents

Is this a big deal? Potentially. For someone from the private sector to be in possession of material information prior to it's being made public could be huge. One time? Hope so. One Fed official? Again, hope so. Maybe just someone from the far more aggressive world of the private sector who took advantage of an academic used to living behind the castle walls? Who knows.

I'll never know enough to make an intelligent comment on this matter. What I do know is that this opens up yet another position at the rapidly changing Federal Reserve Bank. Just to catch you up to speed, Atlanta's Dennis Lockhart retired just a few weeks ago, and Federal Reserve Board Governor Daniel Tarullo (more on him in a second) will retire today, leaving three openings on the board. FYI, the terms of both Chair Janet Yellen and Vice Chair Stanley Fisher expire in 2018, though they could retain their role as governors. What this means going forward is that President Trump will have tremendous power in remodeling the central bank into one of his liking (hopefully with folks who actually have real-world experience). This could be very interesting, given the FOMC's visible change in, if not direction, certainly the aggressive pursuit of that policy direction that timed almost precisely with the president's election victory.

A Mess in the Kitchen

Oh, and by the way, departing governor Daniel Tarullo, in his last public appearance as a Fed official yesterday, seemed to admit that the Volcker Rule is harmful to the banking industry. No way? For those not following closely, Tarullo has been the Fed's top banking supervisor, and has been considered a rather tough watchdog. Tarullo also criticized the method by which the Fed administers its stress test regime. This is sort of like preparing a big meal, messing up the whole kitchen, and leaving the mess for someone else to clean up. OK. See ya later, Dan.

Macro

08:15 - ADP Employment Report (March): Expecting 186,000, February 298,000. The ADP jobs number has now beaten expectations decisively in three of the last four months, topping that trend with a February that "edged" projections by more than 100,000. Expectations are for the trend to have tailed off in March. Though this item will largely be forgotten by Friday, equity index futures will be impacted by this number at the time of release.

09:45 - Markit Services PMI (March-rev): Flashed 53.1. Put this one to bed. Traders don't watch it. The most this release can hope for is that if any one subcomponent prints as an outlier, it would then be compared to the ISM release in 15 minutes for validity. That ISM number will draw trader attention.

10:00 - ISM Non-Manufacturing Index (March): Expecting 57.0, February 57.1. The service sector has been growing at a steady and robust pace for six months now. Especially strong have been new orders and business activity, which in my world implies sustainability. The marketplace will likely react to this item should it fall outside of the 56 to 58 consensus range of opinion.

10:30 - Oil Inventories (Weekly): API -1.83 million, Last Week +867,000 barrels.

10:30 - Gasoline Stocks (Weekly): API -2.56 million, Last Week -3.7 million barrels. The American Petroleum Institution printed sizable draws for both WTI crude and gasoline in their Tuesday evening report, ramping up expectations that the EIA would print similar numbers tomorrow morning. Crude, which had run 1.7% on Tuesday during the regular session, responded by extending those gains in after-hours trading.

14:00 - FOMC Minutes. We already know from the policy statement of March 15 that Chair Yellen was quite satisfied with the state of the economy, and from their incessant drivel, that most of the committee seems to expect continued progress on inflation and is fine with a steady rate of policy tightening prior to attacking the balance sheet. Yesterday's scandalous revelation aside, these minutes will be perused for any unknown information.

20:00 - Fed Speaker: Dallas Fed Pres. Robert Kaplan will speak from Lawrence, Kansas tonight. Speaking of incessant drivel, this is already Kaplan's fifth public appearance that has crossed my radar since that policy decision of March 15. Kaplan is still a voting member of the FOMC. He will take questions from the media at this event.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn:

SPX: 2376, 2370, 2361, 2351, 2345, 2337
RUT: 1389, 1380, 1373, 1365, 1358, 1351

Wednesday's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (MON) ($2.79), (WBA - Get Report) ($1.36)

After the Close: (BBBY - Get Report) ($1.78), (YUMC - Get Report) ($0.38)

At the time of publication, Stephen Guilfoyle had no positions in the stocks mentioned.