Market Direction Week of February 12, 2018©

Market Direction: BEARISH alert issued 2/8/2018

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Last Week Review: Stocks were down sharply for the second week in a row, bringing the S&P 500 down to levels not seen since early-December. Following historically low levels of volatility in 2017, with the largest decline being only 2.8%, stock market volatility has returned, with large daily market swings. The Dow Jones Industrial Average recorded intraday swings exceeding 500 points in each of the past six trading days, including four days with swings greater than 1,000 points. The primary driver of the decline was investors' reaction to rising interest rates. The underlying reason for higher rates are expectations for stronger economic growth, which has led to concerns about higher inflation and more Federal Reserve short-term interest rate hikes.

ECB President Mario Draghi said more harmonized rules across the Eurozone would make it easier for banks to merge. He said European banks are struggling to raise profitability and, “Banking sector consolidation could be a way to help reap economies of scale and allow banks to become more efficient”. How, or if this is possible in a post-Brexit world, is yet to be determined.

The US stock market correction has taken its toll overseas too. While the top to bottom decline in the US has exceeded 10%, Thursday’s (2/8) decline was only about 3.7%, but the decline in the Chinese stock market on Thursday alone, exceeded 5%. Other Asian markets fared a little better; Japan was -2%, South Korea was -2% and Hong Kong was -3%.

How the market finished last week, the S&P 500 down 5.2%, the Nasdaq down 5.1%, and the Dow down 5.2%.

This Week: The earnings season will continue to wind down as 59 companies from the S&P are expected to report earnings next week.

Trading has been treacherous. While past performance is no guarantee of future results, traders with cash on the sidelines who are considering adding equity exposure might want to consider waiting for two consecutive up market days, combined with strength into the close and a VIX at about 20 or below. If these things occur, it might be conveying  reasonable assurance that the worst of this rout is probably over. We are not there yet.

While current VIX levels are implying daily moves in the $SPX of about 44 points, it has actually been almost double that amount. A lot of volatility-oriented hedge and quant funds own monthly VIX options and futures contracts which expire on Wednesday 2/14. This leads me to believe that we may not see this high volatility begin to subside at least until those contracts are closed out mid-next week.

Given the day-to-day and intraday volatility we’ve seen, and the huge degree of disagreement within the indicators, the outlook for next week is volatile again. Remember, volatile means big swings in both directions are likely, so continued caution is still important.

In economic news, Wednesday's inflation report will be very important as much of the market volatility experienced recently has been driven in part by fears of rapidly rising interest rates and inflation. Other economic events coming next week include retail sales on Wednesday and consumer sentiment on Friday.

Economic Calendar: Consumer Price Index (2/14), Philadelphia Fed Business Outlook Survey (2/15), PPI-FD (2/15), Industrial Production (2/15)

Some of the major earnings announcements on deck: PEP, AMAT, CSCO, KO, MAR.

$tockMarketDirection proprietary model is currently BEARISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend. Cha-ching.

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