Monday felt like the calm before the storm, with the major indices closing only slightly in the red as investors played the waiting game ahead of this week’s earnings tsunami.
After some jerky price action, Netflix, Inc. (NFLX) finished 2.4% lower on follow-through selling after last week’s spanking. This caused much frustration among the dozens of fund managers I spoke with late last week who were betting on a V-shaped reversal after the initial post-earnings weakness.
The more we see large tech stocks lose the ability to rally, the more difficult it will become for the multimonth melt up to continue, if only for sentiment reasons.
Energy was the day’s worst-performing sector, falling 1.1%. Today’s first chart is a ratio chart of the Energy Select Sector SPDR (ETF) (XLE) and SPDR S&P 500 ETF Trust (SPY). While XLE showed great relative strength off the January lows, the chart is now bumping into a layer of technical resistance just as the U.S. dollar is beginning to show signs of firming up, i.e., bouncing.
Since energy stocks have been an important part of the three-month rally, traders should keep a close eye on this chart. More weakness in this space will likely weigh on the broader market.
After outperforming on Friday, the Russell 2000 was the clear underperformer on Monday, closing down 0.8% while remaining within its five-day trading range.
Although the iShares Russell 2000 Index (ETF) (IWM) is trading marginally above its 200-day moving average, the ETF has been overbought from a momentum perspective since early March.
Furthermore, the rally off the February lows has largely taken place in an ascending wedge pattern. This pattern tends to see at least a partial retracement lower before moving higher, if not a full one.
Finally, note that IWM has also reached the lower end of a range that acted as resistance for several months. In other words, and to reiterate what I voiced last week in this column, chasing stocks higher at this juncture is a low-probability strategy.
Apple Inc. (AAPL) is scheduled to report earnings after the close today. The options market is implying a 5% to 6% post-earnings move for the stock in either direction. If the options market is correct, then AAPL stock could either rally toward $111 or fall toward $99. Which way it goes will be important for investor sentiment and for the Nasdaq 100 as far as its near- to medium-term direction is concerned.
With that in mind, traders may want to wait and see how stocks react to this week’s earnings parade. To yours truly, from a multiweek to multimonth perspective, the path of least resistance looks to be lower.
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.
