A big test for stocks lies ahead this week as large-cap tech names that are so heavily weighted in the indices report earnings this week, among a ton of other stocks in different sectors and groups. Stocks, broadly speaking, have thus far in 2018 traded with a much different tone. As a result, they have inflicted notable pain to the “buy the dip” crowd that, in February, hoped stocks would quickly shoot to new lasting highs.
In this column I have now discussed for the better part of the past two-and-a-half months that we are likely seeing the stock market go through a phase transition period where the 2017 low volatility melt-up is leading to period of more normalized volatility (i.e. higher volatility) and that could ultimately lead into a traditional bear market within a few quarters down the road.
Some of the large technology names reporting earnings this week are Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG), Facebook, Inc. (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT). By my math, these four names alone amount to 35% of the Nasdaq 100 as represented by the PowerShares QQQ Trust (ETF) (NASDAQ:QQQ).
Considering that the technology sector makes up about 27% of the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), this is one important batch of earnings.
On the big picture multi-year chart of the QQQ ETF we see that so far the index remains trading above its longer-standing channel, although the going over the past couple of months has been much choppier. Ultimately in my eye the QQQ etf will need to mean-revert back into this long-term channel (black parallels) to provide better reward to risk entries for longer-term investors.
This week’s reaction to the aforementioned earnings report should be telling and from a trading perspective, it is in my eye important not to try and get ahead of these earnings reports but rather be reactionary.
Moving averages legend: red – 200-week, blue – 100-week, yellow – 50-week
The all-important semiconductor stocks as represented by the VanEck Semiconductor ETF (NYSEARCA:SMH) don’t look too dissimilar on the charts to the QQQ etf. Last week’s selling spree in this segment of the stock market now has them sitting right at the 200-day simple moving average, a well-defined uptrend line as well as on the neckline of a potential head and shoulders pattern. Tradeable bounces here after earnings are entirely possible but it is equally important to respect any potential breakdown of these technical support levels.
The uptick, i.e. normalization in volatility over the past couple of months has also allowed my favorite stock market income strategy to shine even better than it does during low volatility environments.
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Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day
In summary, this week ahead is likely the most important one for not only this earnings season but also for the past three earning seasons as both top and bottom line comparisons of large-cap technology stock earnings become more difficult.
Check out Serge Berger’s Trade of the Day for April 23.
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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