The market’s rally this month has been a little surprising considering all the bad fundamental data that has lowered expectations. This can make some investors a little skittish about whether prices are too high. If they’re too high, the market is very risky.

However, returns this December have been normal compared to the averages of prior years.

Historically, the average return of the S&P 500 since 1930 is 1.3% in December. If we just look at the positive years, then the average is 2.9%, which is actually on the low end for positive monthly returns.

So far, the S&P 500 is up 1.5% this month, which is a bit above the average of all Decembers but below the return of positive Decembers.

Of course, we have to consider that economic conditions are still relatively poor, which may hint at a slight overvaluation. But we wouldn’t argue that investors are being irrational yet — at least compared to their historical peers.

The bottom line is the economic fundamentals justify a cautious outlook. But if you feel like prices are overextended, the historical data indicates that we are still within a normal range.

Technicals

From a technical perspective, the breakout from the S&P 500’s consolidation on Oct. 25 had a target — based on a Fibonacci retracement — of 3,150. It hit that target on Nov. 27. After that, the index consolidated briefly.

The secondary target is 3,227, which may turn into short-term resistance.

The outlook for earnings next quarter will likely be the biggest factor in determining whether the S&P 500 is able to break above that secondary target. We have to wait until January for most of that data.

However, as we’ve said in the past, FedEx (NYSE:FDX) is often a good leading indicator for what earnings season will be like. Because it is a key transportation and shipping company, it provides services to businesses across all industries. It also reports its earnings a month before most companies do.

It’s not a perfect predictor, but usually a bad report from FDX indicates the potential for rising volatility in the coming quarter.

FDX reported on Tuesday afternoon and it looked bad. Many of the company’s troubles are “unsystematic,” which means they are issues related to FDX but not the entire market. For example, FedEx is in a fight with Amazon (NASDAQ:AMZN) over shipping rates, and it has had a compressed holiday shipping season.

But there are broader market issues affecting the company. FedEx’s management pointed to very weak international business shipping and a weak manufacturing environment as a component of its poor performance.

As you can see in the following chart, FDX was down 9.8% on Wednesday morning. What we don’t know yet is whether the systemic issues FDX is concerned about — slow manufacturing and lower business shipping — have already been priced into the market or if this will be perceived as new information by traders.

Broader Transportation Sector

If FDX’s decline is matched by other shippers like United Parcel Service (NYSE:UPS) and J.B. Hunt (NASDAQ:JBHT), we may have some cause for concern.

But if investors see this as a “FedEx problem” rather than a concern for the whole market, then the other shippers will probably end this week in the green. If that happens, we can feel a little better about the outlook.

In addition to watching FDX, we pay attention to the entire transportation sector.

One of the foundational principles of Dow Theory, which is the root of modern technical analysis, is that a bull trend isn’t fully confirmed until transportation stocks have broken to new highs.

As you can see in the following chart, the transportation sector, as represented by the iShares Transportation Average ETF (BATS:IYT), is still struggling against long-term resistance in the $195-$200 per-share range.

That shouldn’t be perceived as a bearish signal as long as transportation stocks don’t diverge from the large-cap indexes. However, it confirms our cautiously bullish outlook.

Zacks Investment Research estimates that earnings for the fourth quarter of 2019 will be down 3.6% year-over-year.

But as we have discussed before, analysts usually understate the growth rate by 3%-4%. So this quarter could break even when compared to the same quarter in 2018.

If this quarter plays out like the third quarter, we shouldn’t see much damage to investor sentiment. So, although the FDX report is disappointing, we think there is a high likelihood that prices will remain stable in the short term.

The Bottom Line on Q4 Earnings Season

Although the news around trade has been positive, investors are still waiting for the details. This makes the U.S.-China trade war the most significant “x-factor” that could spoil the market. Some terms of a phase-one deal seem promising, but it is hard to see how lower tariffs will motivate China’s compliance with U.S. demands.

We don’t see the tariffs getting worse, but the recent announcements don’t do enough to relieve the uncertainty.

Like many fundamental factors facing the market right now, the trade war isn’t a justification for a bearish outlook. But, it does provide a rationale for why our approach of focusing on income is the most strategically valuable right now.

If the market rises, we make money. If traders get some angst about trade and prices consolidate, we make money. When investors panic a little and prices drop, we may still wind up making money. Or at least we will lose much less, which makes for a quicker recovery.

As we look ahead to a very quiet holiday week, the outlook is moderately positive. Most of the unknowns are things investors have become accustomed to over the last 18 months. Our plan is to focus on harvesting income from the strongest stocks in the market through the end of the year when investors return to work.

John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it. John & Wade do not own the aforementioned securities.