AI Volatility Predictor: Spring is coming

RoboStreet – April 5, 2018

First Quarter Earnings Season Should Put the Bull Trend Back on Track

Stocks are regaining their footing after flirting with a serious technical breakdown earlier in the week. The S&P 500 breached its 200-day moving average briefly and regain its composure when more clarity about the severity of pending tariffs might have on the U.S. economy. The notion of the announcement of tariffs takes several months to implement and are now viewed as an initial shot across the bow that will lead to a much-needed dialogue on fairer trade between China and the U.S.

The White House also tried to diffuse the fear of a full-blown trade war after seeing the stock market swoon in reaction to the disruptive news. Bullish sentiment came back into the market late Tuesday and Wednesday when investors viewed the tariffs as more of a threat and not an eventuality that would come to pass. There is no question this is high-stakes poker in the world of trade, but it is meant to get a serious discussion going about the massive trade deficit the U.S. has with China.

The overhang of issues weighing on the FANG stocks (Facebook, Amazon, Netflix, Google) carried over into the first trading day of the second quarter. The tech sector makes up 23% of the market weight of the S&P500. The FANG names, along with Apple, are about 10.6% of the S&P 500. Technology has the largest sway over the fortunes of the overall stock market and for such a few number of companies to have so much clout, it makes for a high propensity for volatility when these stocks stumble.

News of the Trump administration working on a pre-arranged NAFTA deal would help to stabilize the market as the focus of investor attention is on global trade being disrupted, more so than the privacy issues with Facebook, the specter of regulatory oversight over Google’s tight grip on search and content dissemination or Trump’s singling out of Amazon for abusing the postal system and not paying enough in taxes. Though much of what these stories might be chalked up to “noise”, it matters because when they tank the FANG stocks, it triggers program selling that spreads quickly to all sectors of the market and selling simply begets more selling as fear of steep losses feeds on itself.

First quarter earnings season begins in earnest April 13 when JPMorgan, Citigroup, Wells Fargo and PNC Bank report. And then the week of April 16, the earnings floodgate opens. Being that is a full two weeks out from today, the market will likely continue to exhibit an unstable landscape. The S&P closed below its 200-day moving average while the Dow, Nasdaq and Russell 2000 are all trading slightly above their 200-day lines. The Feb 9 low for the S&P was 2,533 and is an important technical level that will influence the very short-term direction of the market.

Speaking of earnings, the technology sector should lead all sectors in terms of sales and earnings growth. We’ve already seen upside guidance in the past few weeks from Salesforce.com, Palo Alto Networks and RedHat after all three companies recently reported very robust fiscal earnings, which sets the tone for a strong showing by the software sector. Business investment targeting IT is the highest it’s been since 2011 and that has to be good news for the likes of Microsoft, which I’ve highlighted recently and made it a core portfolio holding in our RoboInvestor model portfolio as of last week.

In addition to promising expectations for software companies, the semiconductor and networking sectors should also shine as they continue to benefit greatly from the growth of cloud computing, data centers, smart phones, mobile computing, artificial intelligence (AI) and Internet of Things (IoT). Look for the tech sector leadership to broaden out from the FANG stocks to other notable names like Microsoft, Adobe Systems and Salesforce.com, Intel, Cisco Systems and Booking Holdings as fund mangers diversify their tech exposure.

I’m of the view that 2018 will be characterized by a pattern of heightened levels of volatility throughout the year. 2017 was a gift to investors wanting an easy ride, and they got it. This year will in my view end higher, but not without experiencing sharper peaks and valleys along the way. We can see this illustrated by my proprietary Tradespoon Seasonal Chart below for the S&P 500. The green line represents the forecasted trend for the market through December and the dark shaded blue line represents how the market is actually trading, which shows just how the uncorrelated the S&P is relative to the seasonal trend.

The good news for the month ahead is that April has a history of being quite bullish and yet the S&P is trading at a steep discount to in sync with the historical trend. Technical resistance for the SPDR S&P 5f00 ETF (SPY) is well defined at 262.095, which was cleared this past Tuesday. This sets up a move higher towards the next overhead resistance level at 270.0 -272.0 where if cleared, opens up the probability of the S&P trading to a new all-time high. All the market needs is a fresh catalyst to fuel an April rally to new highs and earnings season ought to be just the ticket to get it done.