E Wading Through The Market During Earnings Season

While Friday’s relief rally proved a welcome sight for many investors/traders, it may also bring about future selling pressure. With a VIX still above 20, signaling 1.2% daily SPX moves, the market is anything but calm and ripe for continued, large daily moves. A more common saying amongst the trading crowd is that “there is no predictability in the midst of greater volatility.” Right now, with the VIX above 20, investors/traders need to be prepared for anything and assess risk daily.

“I don’t see evidence of what you’d like to see in a bottom,” said Willie Delwiche, investment strategist at Baird. “Markets tend to bottom after more signs of capitulation and widespread panic, which we haven’t seen thus far.”

At present, this is what we identify as a trader’s market given the time of year and recent market moves. If you think last week’s $48 weekly expected move for the S&P 500 was large, this week’s is that much more grand.

As I’ve stated in many weekly research reports and articles, the market has remained incredibly efficient since the springtime. We’ve only managed to breach the weekly expected move on the S&P 500 three times in the last 25 weeks, until this past week of course where we breached it in a big way.

In the screenshot above of the S&P 500 options chain, we discover that this coming week’s expected move is an even bigger one than last week at $71. This is what you get with a VIX above 20 and a market that has breached the prior week’s expected move in a rather major way. Risks are abundant, high and in need of being assessed by traders and investors alike. Overexposure to the market is not your friend at the moment and likely not until the current market move is completed. Actively trading smaller positions in such an environment can prove to off-set portfolio drawdowns in the interim and assuming the volatility continues in the near term.

For those of you who have been reading my weekly articles on TalkMarkets, you already know why the market has expressed a pullback from its upward trajectory and all-time highs. Fears of interest rates rising, the Federal Open Market Committee raising rates too quickly and the fears of a Fed-induced economic slowdown have all been blamed for the pullback in equities. Beneath these headlines are details and those details include richly valued tech stocks whereby their large debt obligations come into question during a rising rate environment and an ongoing trade war that curtails profit margins on certain goods and industries. The sad thing about the aforementioned headlines and details is that… well, they are all self-inflicted. We’re literally doing this to ourselves. It’s our Fed that is tightening, which also has an adverse affect on the USD. It’s our White House Administration that is instituting trade spats and implementing tariffs. Having said that, an optimistic way of looking at the current challenges from these issues is that what has been self-inflicted can be self-remedied. We’ll have to wait and see how this all plays out.

Q3 2018 Earning Season

Thus far, 28 S&P 500 companies have reported Q3 2018 results. Of the 28 companies in the S&P 500 that have reported earnings to date, 85.7% have reported earnings above analyst expectations. This is above the long-term average of 64% and above the average over the past four quarters of 77 percent. In short, we are off to a strong reporting season and with some of the big banks having already reported this past Friday.   We’re paying even greater attention to what the big banks have to say in their quarterly reports as fears of higher interest rates may impact loan growth. So let’s look at one of the banks that have already reported before moving on to previewing some of the economic data reports for the coming week.