Market Direction Week of October 15, 2018©

Market Direction:BEARISH alert issued 10/11/2018 

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Last Week Review: Equity markets finished lower in what was a volatile week. Worries about rising interest rates, heightened China trade tensions, and other international risks weighed on stocks, resulting in the largest weekly loss for the S&P 500 since March. Weakness was broad-based, with the faster-growing and more cyclical sectors declining the most. Early in the week the International Monetary Fund (IMF) dialed down its growth expectations for this year and next, partly due to U.S./China trade tensions. Adding to the uncertainty were a small number of companies issuing profit warnings, making investors nervous about the upcoming earnings season. The week finished with prices stabilizing on Friday, as tensions between U.S. and China appeared to ease. Inflation also rose less than expected, calming worries about faster-rising prices. Despite all the negative headlines, companies in the S&P 500 are expected to report third-quarter earnings up almost 20% over the past year, according to FactSet. Those positive fundamentals support our outlook for rising stock prices over time. Historically, stocks have declined by 5% or more about three times a year, so this looks like normal volatility.

This week the SPX dropped below its 50-day, 100-day, and 200-day Simple Moving Averages (SMA) which is significant from a technical perspective.

From a bullish perspective regarding this week’s sell-off, you probably want to see markets experience a sharp, swift correction, rather than a gradual drawn-out sell-off which is likely more characteristic of a change in trend. It doesn’t appear like the 200-day SMA (2,766) is going to provide the same level of support that it did back in February, Mach, April and May of this year, so the next support level appears to be ~2,700 where the index found buyers back in late June.

Similar to the S&P, the Dow is currently below its 200-day SMA, though by not as much. Looking ahead, if the Dow’s 200-day SMA doesn’t hold up like it did back in late June, look for support at the 24,000 level followed by 23,500.

The NASDAQ looks similar to the SPX/DJI with ~7,000 being the next level of support:  

How the market finished last week, the S&P 500 down 4.1%, the Nasdaq down 3.7%, and the Dow down 4.2%.

This Week: There was an average amount of economic reports this week and the consensus appears to be a modest bearish-bias based on the number of reports that missed expectations.

Rising rates sends stock investors to the exits this week. While volatility will likely persist in the near-term, the bias appears to favor the bears.

Volatility is still very much alive and it’s being reflected in the VIX, which has moved into positive territory at the time of this writing (VIX + 0.50 to 25.48). I expect volatility to continue into next week, and perhaps a re-test of Thursday’s intraday lows and/or an SPX 2,700 test is in order.

However, next week we are going to get a slew of earnings reports from a broad range of industries and the big question mark is what they are going to say in terms of forward guidance. Are tariffs and potentially higher wages, raw material and borrowing costs going to put pressure on margins? We’ll have to wait and see.

Economic Calendar: Retail Sales (10/15), Capacity Utilization (10/16), Industrial Production (10/16), Leading Indicators (10/18)

Some of the major earnings announcements on deck: JNJ, NFLX, PYPL, CSX, UNH.

$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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