August 1, 2016, 4:00pm EST

Stocks printed another fresh record high in the S&P 500 today before falling back.  As we discussed Friday, the BOJ undershot expectations last week, because many thought anything short of full blown debt monetization (to coincide with fresh fiscal stimulus to be approved this week) was a disappointment.

But doubling the size of ETF purchases was kind of a big deal, especially if you consider where their stock buying program has come from (1 trillion yen), where it is now (6 trillion yen), and what it has meant for the performance of Japanese stocks (and global stocks).

Still, just as the Fed opened the door last week to a September rate hike, the BOJ opened the door to a revamp of its current QE program in September.

Remember, the last time the BOJ came in with a doubling down on their QE program (a QE2 for the BOJ) was in October of 2014.  That same month, the Fed ended its QE program.  As we’ve said, the Fed has only had the confidence to end emergency policies (that includes the beginning of a tightening cycle) because they know the BOJ is there to take the QE torch.

Now, with earnings season nearing an end, we’ve now heard from a majority of the companies in the S&P 500, and the positive earnings surprises continue to provide fuel for stocks.

When earnings reports were kicking off in the middle of last month, we said:  “Among the reasons we’ve thought stocks look well underpinned and the economy could be in the early stages of a boom, is that the bar has been set so low, in terms of expectations, that we’re set up for positive surprises — both in earnings and economic data.  Surprises create changes in outlooks.  And ‘change’ is the primary catalyst that moves/reprices markets.

Last earnings seasons 72% of the companies in the S&P 500 beat expectations.  Still, companies dialed down expectations coming into the second quarter.  Wall Street then lowers its bar.  And they beat.  

Like it or not, that’s how Wall Street works and has always worked.  FACTSET says on average (the five-year average) 67% of companies in the S&P 500 beat their analyst expectations.  And they beat by an average of 4%….As we know, better than expected earnings are fuel for stocks.”

So now 71% of the companies that have reported have beaten expectations on earnings for the past quarter.  And 57% have beaten on revenues.  The media will continue to point to the lower decline in earnings compared to last year and wonder why stocks are going higher.  But, again, that information was priced in, and stocks reprice on change.  And earnings beats represent change/ new information.

This week we have another jobs report.  Non farm payrolls/job creation is the data point that market participants and the media have been trained for decades to over analyze/over-emphasize. We’ve had and will have undershoots and overshoots on the number.  But for the Fed, an unemployment rate around 5% and non farm payroll number averaging 200k a month, the jobs data is in pretty good shape.

The biggest risk to stocks in the very near term is oil.  We talked about keeping a close eye on the slide in oil, a market that was, at one point earlier this year, THE most important market in the world.

On that note, we said, “in a world where stability is king, central bankers have been very sensitive to swings in key financial markets, with the idea that confidence and the perception of stability can quickly become unhinged by market moves. When that happens, it becomes a big, viable threat to the global economic recovery and outlook.”

At $26 oil was threatening another global financial crisis. It bounced aggressively after the BOJ stepped in and intervened in USDJPY back in early February.  Oil bottomed that day, so did stocks. Soon thereafter, oil doubled and stocks have printed fresh record highs.

But oil has been moving lower in recent weeks. As we said, this will grow in importance, and send negative signals, if it were to continue lower.

It has indeed continued to slide, closing today just above $40.  We’ve looked at this chart of oil and the S&P 500.

Sources: Billionaire’s Portfolio, Reuters

When the oil price bust was threatening economic stability, stocks were moving almost tick for tick with the slide in oil.  But we’ve had some significant divergence in the past few weeks, with oil going lower and stocks going higher.  And oil trades $40 today, which is a huge level.  Expect this gap to close, with either a slide in stocks, or a nice bounce on the retracement in oil.  We bet on the latter.

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