Market Direction Week of October 29, 2018©

Market Direction:BEARISH alert issued 10/11/2018 

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Last Week Review: Stocks sold off this week as investors reacted sharply to disappointing earnings reports and forward outlooks from a small number of high-profile companies. Despite some negative headlines this week, corporate earnings overall are still pretty strong, with earnings growth of about 20% from last year. While sizable fluctuations like we saw this week can be unsettling, pullbacks are far less worrisome when put in the context of broader market performance. While the S&P 500 is roughly 10% off its recent high, it is still up about 4% from year-ago levels.

The Dow hasn’t suffered as much as the SPX on a percentage basis (-8.64% at the time of this writing) but is in a similar situation as the index has the lost support of its major moving averages (50-day, 100-day & 200-day SMA). In terms of next support levels, the June 28th low of 24,000, followed by the Feb closing low of ~23,500 are likely candidates.

Similar story for the NASDAQ (-12.35% off all-time highs) with the April low of ~6,800 followed by the February 9th intraday low of 6,630 as the next potential support levels.

Based on the current price of 2,669 the SPX is roughly 271 points (or 9.2%) off the all-time high of 2,940 hit back on September 21st. This is getting close to the peak-to-trough 340 point drop (or -11.8%) on an intraday basis or 291 point correction (or -10.1%) on a closing basis that the index endured during the February correction earlier this year. In terms of the next support levels to watch for, I’ve got my eye on the May 3rd low of 2,592, the April 2nd low of 2,553, followed by the February 9th low of 2,532. If the SPX were to drop to these levels in the coming days/weeks, on a peak-to-trough basis the May 3rd low would represents a 11.76% correction, the April 2nd low a 13.10% correction and then February 9th low a 13.87% correction. It’s possible that an 11-13% drop would be enough of a correction, or an “event”, to satisfy technicians and mark a short-term bottom. It’s way too early to say at this point, so we’ll just have to take it day-by-day and see what happens.

How the market finished last week, the S&P 500 down 3.9%, the Nasdaq down 3.8%, and the Dow down 3.0%.

This Week: Roughly a third of the S&P 500 companies have reported Q3 earnings and so far, approximately 63% have beat on the top line while 82% have beat on the EPS side.

Volatility likely to persist next week with earnings, upcoming mid-term elections, and Friday’s jobs report on the docket. Stocks are near-term oversold, but perhaps not yet enough to call a near-term bottom.

I know that many could argue that markets are near-term oversold, but it doesn’t quite feel like we’ve achieved that capitulatory “flush-out” yet, especially with mid-terms and a FOMC meeting on the horizon. I’d like to see a +10% peak-to-trough correction in the SPX and a +30 VIX in order to feel more confident that a snapback rally is getting close. Therefore, I expect volatility to continue next week and investors to be more sensitive to headlines, economic reports and earnings misses (and there’s a lot to keep an eye for next week). Beyond that it’s tough to predict but I’ll suggest that it’s likely that we get bearish market action for the week, and if we get a big enough of a “wash out”, a bullish rebound in the second half of the week.

Economic Calendar: Personal Income (10/29), Consumer Confidence (10/30), ISM Manufacturing Index (11/1), Employment Report (11/2)

Some of the major earnings announcements on deck: KO, FB, MA, AMGN, BABA.

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