Slippery Slope

Slippery slope.  Markets slipped once again in Friday’s session despite a solid read on GDP, which continues to show strength in the US economy.  Disappointing earnings calls from Amazon and Alphabet/Google were the primary drivers of the broader selling.  Friday’s session seemed to typify trading for this quarter’s earnings season thus far in which top and bottom line beats are rewarded with selling.  First of all, a “beat” is Wall Street talk for a company’s beating expectations on earnings or revenue numbers.  If companies exceed the consensus expectations for performance one would expect that company’s stock to trade up right?  Well, not always.  Remember that I have been harping on the fact that markets aim to reflect broad opinion on the future health of companies.

So is the past irrelevant? No, not at all.  A healthy company has a better chance of performing well in the future.  So how do we know what will happen in the future?  Obviously we can’t predict where the market will be in the future (let alone tomorrow), but once a quarter, companies kind-of break the rules a bit and offer anyone who will listen some inside insight on what a company’s performance might look like in future quarters.  This is known as “guidance”.  Guidance used to be something that was limited to only the elite Wall Street analysts, but today guidance has become available to a broader audience who, in most cases, can listen in to these once sacred earnings calls and hear the CEO and CFO give a narrative of their company’s performance.  In some cases, these calls can be quite a show.  Two extremes would be Berkshire Hathaway (releasing this week), which can be educational compared to Tesla (released and beat last week) which has at times been quite chaotic (Elon Musk).  So about 77% of S&P500 reporting companies have beaten expectations thus far, which seems pretty healthy, but the guidance has been disappointing, which explains a lot of equity market behavior during this earnings season.

Let’s take a quick look at my attached daily chartbook to see where we stand.  On Friday, the S&P 500 briefly slipped into correction territory but managed to close off its lows of the session.  The large cap index closed in the middle of a range that will be dictated by its 2635 and 2693 Fibonacci lines (chart 4). The Dow Jones Industrial Average also closed off its session lows down -1.19% on the session.  The Index is also in a range that will be flanked by 2 Fibonacci lines at 24393 and 24883 (chart 6).  The small cap Russell 2000 bounced off of its low close for the year and closed off of its session lows down -1.1% on Friday.  One would have to go back far to find some good technical support at these levels.  1463, the low for the year and 1459, which is around the low close of the year will be support for the Russell (chart 7). The NASDAQ 100, took it on the chin closing off -2.34% in Friday’s session.  The move down was led by tech shares in response to disappointing earnings calls.  The NASDAQ continues to trade below its 200 day moving average and will also get support and resistance from Fibonacci lines at 6705 and 6895 (chart 8).  All of the S&P, Dow, Russell 2000, and NASDAQ remain risk off.  The VIX index closed slightly lower on Friday but still remains in the indigestion zone, well above the magic 18 number, indicating more volatility ahead (chart 5).  The NASDAQ and Russell also have volatility indexes (though they are not commonly followed) and they too are well into the pressure zone trading in the high 20’s.  Another notable chart is the Growth Relative to Defensive indicator (chart 16), which graphically shows a continuing shift from growth sectors into defensive ones.  This can also be seen quite clearly on chart 2, which displays trailing 60 day Sector Returns.  The charts show declines in all sectors except minor gains in Consumer Staples and Utilities, which are both defensive sectors.  Finally, bonds rallied in response to equity market declines bringing 10 year yields to around 3.7%, where they will start trading this morning.  10 year yields will get support at its 3.05% Fibonacci line, which is in contrast to the 3.25% resistance line created a few weeks back at 3.25% (chart 20).  The 2/10 yield curve flattened last week with 10 year yields receding faster than 2’s and it will start the week at 26 basis points (charts 17 and 18).

Today we start a long week of economic and corporate earnings releases (see attached calendars with expectations and call in numbers).  This morning we get Personal Income and Spending, both of which are expected to show a rise of +0.4% up from last month’s +0.3.  The PCE Deflator (Personal Consumption Expenditures) is the inflation index that is most watched by the Federal Reserve and it is expected to show a year over year growth of +2.0% compared to last month’s +2.3%.  The PCE Core Deflator, which excludes volatile items such as energy and food, is also expected to have grown at +2.0% after last month’s +2.0%.  Any deviation from expectations will be market movers as all eyes have the Fed in their peripheral vision fields.  Also this morning we have a few pre-market earnings releases to kick off another big week of corporate events.  The week ahead will be similar to last, filled with lots of economic data to ponder and lots of earnings releases to parse through.  Adding in a heightened level of political wrangling as we get closer to next week’s mid term elections, the markets will continue on their recent path of volatility.

daily chartbook 2018-10-29