The Honeymoon Is Over for the Stock Market

After an epic early 2018 rally, stocks now face an uncertain earnings season

After an epic 2.50% rally for the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and nearly 4% for the Nasdaq 100 as represented by the PowerShares QQQ Trust (ETF) (NASDAQ:QQQ) last week to kick off 2018, I suspect things will get a little trickier here in the coming weeks as earnings season is on tap.

To wit, major banks like JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) are kicking off earnings season this week, which from a trading perspective led me to book profits in those names into last week’s broader market rally. While I still like the idea of owning large-cap banking stocks through the intermediate term lens, for now, I am looking to reevaluate these names after earnings are out of the way.

While sector and group rotation within the stock market will no doubt again in 2018 be a major source of alpha generation for traders and investors, my focus in today’s opening missive is the large-cap U.S. indices and indeed a first warning message for 2018.

So you know, I remain bullish stocks in 2018 for now, but being bullish doesn’t mean one has to buy or sell at any price.

As such and starting off with the weekly (increments) chart of the SPY ETF, note that last week’s rally further pushed the index toward the very upper end of both its two-year as well as nine-year up-trends. As a result of last week’s frolic the weekly MACD momentum oscillator at the bottom of the chart now reads significantly overbought as well.

To be clear, none of this means that stocks now all of a sudden have to fall apart from here. The way I look at this is that these current conditions simply mean that reward to risk on the upside and at this rate have worsened further last week, for the immediate to near term.

In other words for active investors and from where I sit, the end of last week was a good time to book at least some profits in stocks through the lens of sound risk management, with the idea of buying again somewhat lower.

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

The Nasdaq 100 QQQ etf last week blasted higher by nearly 4% in four sessions and as a result, also tagged the very upper end of its 2009 up-trend. Instead of chasing at these levels, taking a step back and protect some profits seems like a noble idea.

One can do this by either simply booking some profits or if options are an interest, buying some index protection via puts in the SPY or QQQ ETF.

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In other words, I see risk increasing of a volatility spike around earnings season, which would allow active investors to buy stocks again at hopefully at least somewhat less overheated levels.

More specifically regarding technology stocks, the first quarter tends to be good for this sector. But here too, some cooling off could go a long way to provide better probability entry points again for long positions.

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

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