As long time followers and readers know I’d like to keep it light, but real. And in the spirit of keeping it real I offer this latest analysis of markets.

Having traded for many years I’ve come to accept that around 2-3 times a year I’m not in sync with markets. March has been one of those periods for me. While January and February offered wild volatility in both directions (which I love as a trader) March has been a one sided affair with the occasional intra-day dip, but one central bank induced rally after another. And believe me for the FOMC to move from a 4 rate hike expectation to practically zero is action. It is effective easing in terms of expectations.

What has worked well so far this year? In my 2016 technical outlook I highlighted the downside risks. During the January and February corrections I outlined the market’s propensity to want to reconnect with key moving averages and wanting to fill the January gap and this formed the basis for our long strategy at the February lows.

Then came the big rally which wasn’t a big surprise in light of the analysis. Filling the January gap was also not a surprise. But what has been a surprise has been the straight-line up move of this rally and the extension above the January gap without a basic retrace or pullback so far.

According to the public narrative the correction is over and central banks have given the green light to buy stocks. No really:

$SPX 2065 sentiment check pic.twitter.com/LTQUhFsXfc

— Northy (@NorthmanTrader) March 31, 2016

And look, I get the argument: Don’t fight the Fed, but there is an inherent danger of getting all gloomy at bottoms and all bullish after a big move:

I do pay attention you know….#godfatheroftechnicalanalysis pic.twitter.com/1oMCEV9EQH

— Northy (@NorthmanTrader) March 31, 2016

From a trader’s perspective I find these public calls to be completely meaningless and, if anything, they can be useful from a contrarian perspective.

Remember we said exactly the opposite at the time of the February lows:

In the meantime, for all the reasons outlined, I will remain a buyer of weakness should we drop into 1780-1810 today.

I present all this so you have a sense of the popular narrative and context at the moment.

Here’s my problem with all this: Despite all the giddiness I see a group of canaries in the coal mine here and they are singing a concerted song that’s taking on an ever more disturbing pitch. For what it’s worth here’s what I’m seeing and you can judge yourself of course if I’m on the right track here or not.

Let’s start with one question: Have central banks won? The answer is I don’t know yet, but their effort has been coordinated in time and response and this much is self evident:

The $SPX has moved virtually uncorrected from February 11 – April 1. 264 handles on the $SPX or 14.5%. If it sounds enormous it is because it is. But it’s also not unprecedented. After all, in 2008 we saw a similar sized rally from the March lows into the May highs: 14.6%

Here’s the interesting part: That rally back then occurred despite an emerging decline in GAAP earnings and that was the big canary back then.

Here’s the story now:

A 18% decline in GAAP earnings since the peak last year. The immediate consequence: Markets are now more expensive than they were last year.

The long term trend comparison:

So GAAP earnings will either continue to decline or they will rise. My argument is they HAVE to rise from here to sustain this move in price. If they decline then the path forward should be pretty clear. Declining earnings is one big canary.

The reason all this is interesting is the fact that companies recently have resorted to reporting pro forma earnings ignoring $GAAP earnings. The simple explanation: Make things look better than they are.

And the gap between reality and make believe is widening at a rather alarming rate:

And so for me at least, Q2 is all about earnings. And if earnings suddenly improve then they will likely push this market to new highs. If they don’t my sense is we fall apart.

So far the evidence is this:

Via @FactSet pic.twitter.com/sLEP0yoNl2

— Northy (@NorthmanTrader) April 2, 2016

And if GAAP earnings are a key canary then perhaps so are financials. Where’s the rally I keep asking?

Maybe banks mean nothing, but in case they do here’s the quarterly price performance for key European banks:

And maybe, just maybe these canaries will prove meaningful as some of this data suggests:

Another canary: The consumer. We hear how consumer confidence is better and how lower oil prices will cause more spending. Really? Crude just jumped 50% and we didn’t see any evidence of increased consumer spending as highlighted by a 0.6% GDP growth in the first quarter.

No the data that is coming out for the consumer suggests something very sinister: Incipient inflation in Fed ignored spending categories that are killing the consumer:

These are enormous and profound trends and not easily reversed.

It will take substantial amount of wage growth to counter these effects and wage growth remains a very lagging component.

And finally, data collected seems to suggest that 93% of net notional buying this quarter came from one source: Fed enabled buybacks:

Another canary.

Now the technical context:

Markets can stay overbought and oversold for a long time and the past few weeks have been testimony to that assessment. Yet, at the end of day, trading is about risk versus reward. And warning signs keep mounting:

Money flow have negatively diverged with RSIs over 70:

$BPSPX has negatively diverged from price:

Hi/Lows are pushed into close to max territory:

Cumulative net adds have reached the highs of last summer while price has not:

$NYSI is crammed to the wall:

Stocks above their 50MA made a lower high while $SPX made a slightly higher high:

And while $SPX has cracked above the arch:

…one has to question its sustainability given the failure of equal weight to re-caputure its quarterly 5 EMA:

and the $VIX screaming complacency:

All this when stocks are about to hit much larger confluences of resistance:

So what’s the takeaway here?

For me it is this: The FOMC tested the waters with a teeny rate hike in December and global stock markets completely fell apart highlighting how thin this thread is. Central banks coordinated a global response with more QE, negative rates and taking away any notion of a rate hike in the US to re-inflate asset prices. They have succeeded so far, but let’s be very clear: Without this action prices would not be where they are now.

So if you want to buy long here you must do it in the belief that central banks are maintaining control over a construct that would fall apart if they didn’t keep pressing the button.

The main argument for control at the moment is that Janet Yellen’s policy reversal will continue to pressure the dollar and this will improve earnings. Perhaps. At the same time we have seen rallies in commodities and a slight uptick in wage growth which will act counter to currency benefits. In a tight margin world with little revenue growth we’ll have to look for the net net benefit during this next earnings season.

For now we can observe that this recent rally is increasingly confined to US markets as European and Japanese markets are struggling despite QE and negative rates:

But not to worry. The next OPEX ramp may just be around the corner. Who needs earnings:

All joking aside: Markets remain at a key crossroads here and in principle the steeper a rally is the more rude the awakening generally is.

For now all we can observe is that since the end of QE3 it’s been tough slugging for stocks:

Lower highs and lower earnings. That’s the reality. And so far central banks, despite all their best efforts, have not been able to change this fact.

Q2 then will likely shape up to be precisely about whether earnings can grow. They better.

Let’s see what’s real.