A Make-or-Break Week for the Stock Market

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Could this be a make-or-break week for the U.S. stock market? In conversations with hedge funds and other smart-money investors last week, that was a thought we mused and not because we are particularly bearish on stocks but because seeing and respecting all possible outcomes in financial markets is what a winning risk management mindset is made of.

A Make-or-Break Week for the Stock MarketThis week a major avalanche of earnings reports will hit the news wires, which notably will include a starter group of tech-related stocks such as Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) as well as a pack of large-cap biotechnology stocks.

According to Factset, thus far 73% of S&P 500 companies have reported better-than-expected earnings, and by my math on a year-over-year comparison, earnings per share are up roughly 10%.

All in all, these are promising numbers, yet to see both sides and considering the heavy weight of large-cap tech stocks in the indices as well as their psychological impact on investors, following the earnings and outlook from these companies there is some risk that investors take profits in this space. This in turn could have a snowballing effect in the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) as well as the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).

Checking the Charts


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For perspective, I crafted the above multiyear chart of the QQQ ETF, which shows that it is once again trading at and even marginally above the upper end of this range. From a reward-to-risk perspective, in the near to possibly intermediate term, this does not set up what I would refer to as a high-probability trade to buy the QQQ ETF and, for that matter, any of its major constituents, despite the fact that structurally speaking and for the longer term, I remain a bull on large-cap technology stocks such as Alphabet.

Coincidentally (or maybe not so much), the CBOE Volatility Index, or VIX, last Friday reached a 20-year low near 9.3, which while not a major warning sign in and of itself, does now offer active investors a near unprecedented opportunity to buy “cheap” portfolio insurance via things like put options in the SPY ETF, something that I will be looking to do very early on this week.


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In that vein and for perspective for ye faithful, I once again crafted my hungry alligator chart where I plotted the S&P 500 in green and the VIX in red. The massive divergence speaks for itself, yet this too is no actionable catalyst to dump all stocks and scream for help. Ultimately, some sort of price confirmation (real selling pressure in the indices) is needed to confirm a near- to possibly intermediate-term top in stocks.

This week I’ll be hosting a special webinar Wednesday for InvestorPlace readers to explain one specific strategy that traders and investors can apply for winning monthly and quarterly income trades in the current market environment.


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Finally, while last week the broader U.S. stock market continued to advance, we did witness some group rotation out of transportation stocks as represented by the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA:IYT). Add this into the mix and it did make more than a few investors last week (myself included) sit up and take notice.

To be clear, the IYT remains in an intermediate- and longer-term up trend, but watching this group of stocks closely at this juncture is well advised.

Conclusion on the Stock Market This Week

In summary, the US stock market continues to trend higher and that should primarily be respected by traders and investors alike. At the same time with the S&P 500 approaching the 2,500 mark and the VIX tracking near all-time lows as earnings season kicks into high gear this week, buying some cheap portfolio protection and/or lightening up on some stock or broader market ETF exposure in my eye is simply sound risk management at this juncture.

Check out Serge’s Trade of the Day for July 24.

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. (

Take Serge’s quiz to find out which trading strategy best suits your personality.

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