Before the start of trading on Tuesday, I received no less than four calls from brokers, each of them spewing new bullish ideas and upping price targets on a wide variety of stocks and indices. I snickered to myself as those were some of the same brokers calling for a repeat of 2008 near the February lows.
I can’t help but find it reckless to only get bullish after big rallies and bearish after big sell-offs. So it goes, though, and emotions constantly get the better of the majority of investors, leading to irrational buy and sell decisions.
On a single-stock front, Tuesday saw some ugly moves in Netflix, Inc. (NFLX) and International Business Machines Corp. (IBM) after the companies released earnings. If this is foreshadowing of what is to come this earnings season, the tech sector could begin to weigh on the broader market.
In the previous Daily Market Outlook, I showed the big divergence between the S&P 500 and the Volatility S&P 500 (VIX). Today, I want to highlight another comparison between the two.
On the chart below, note that while the S&P 500 continues to push higher, the VIX is trying to make a higher low versus its early April lows. This type of divergence is often a good indication of a near- to intermediate-term turning point for stocks.
Now, let’s take a look at bank stocks, which have experienced a nice rally in recent days.
I view the price action in the KBW Nasdaq Bank Index since the February lows as a countertrend A-B-C move, which is now approaching technical resistance.
Considering the still moderately dovish Federal Reserve and unsupportive U.S. economic data, it is difficult to imagine the yield curve steepening dramatically anytime soon to benefit banks.
For its part, the small-cap Russell 2000 is peeking above its downsloping 200-day simple moving average for the first time since summer. The problem is that this is taking place after an already steep run off the February lows with momentum oscillators now very overbought and the index trading in an ascending wedge pattern.
Therefore, this isn’t a setup worth chasing higher. In fact, a bearish reversal would set up a solid short-side opportunity for an initial move back to the 1,080 area.
Conclusion
All in all, we saw some nasty post-earnings reactions and Tuesday’s move was simply another melt up for the broader market on thinning market breadth. I remain cautious and will not chase this market higher.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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As of this writing, Serge did not hold a position in any of the aforementioned securities.
