Another day, another failed rally for stocks. Blame Friday’s failure on a weaker than expected jobs report, blame it on trade war fears … blame it on whatever you want. I have been flagging this phase transition environment for the past two months and warned of a higher volatility environment through 2018 as early as in December 2017 while looking at the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
This year will by no means be as easy for traders and investors alike. Just as more active managers turned passive last year, it now once again pays to be active. The trouble is that as a result of the no-volatility stock rally of recent years, many fund managers and retail investors forgot what it means to have performance down weeks and down months, i.e., to deal with a more normalized volatility environment.
Reiterating a risk management note: As the past two months have brought about a notably higher level of volatility to stocks, it has also become abundantly clear to yours truly that many market participants have forgotten how to deal with volatility and much less so how to risk-manage a portfolio through these ups and downs. To be clear, this is a late-cycle phenomena, where after a nine-year bull rally, people have become complacent and conditioned to blindly buy any dips. Once that stops working (and I think we are nearing this point), much money is lost on part of the bull crowd and frustration levels rise.
As we will see on the below charts, important indices and groups of stocks are holding on to key technical levels and this comes just as the Q1 earnings season is set to kick off this week and banks like JPMorgan Chase & Co. (NYSE:JPM) will be first to report.
Once again, note the overshooting rally on the multi-year weekly chart of the SPY, which we had in January. This has led to a mean-reversion back to the well-defined support line and the yellow 50-week-simple-moving-average. At the same time, the volatility index (VIX) at the bottom of the chart has transitioned into a higher trading range.
Thematically, I am switching from a buy the dip mode into a sell the rip mode. Technically speaking, on the charts, the $253 – $254 area is important to hold on a weekly closing basis. The longer this index just muddles around here, the better the odds get that we see another flush lower, possibly toward $240.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
The financials sector of the S&P 500 as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is holding on to a similarly precarious technical spot as the SPY. From a pure momentum perspective, this part of the market has plenty further to fall, and that lines up with this week’s kick-off of earnings season. At the very least, the financials ahead of earnings are not something I want to blindly buy. I would either look to buy a strong bullish reversal or after another flush lower, for a trade.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
In summary, stocks remain at a precarious technical juncture now for the third week in a row just as earnings season is set to kick off later this week. Risk management, i.e., profit protection should rule one’s objectives, as opposed to reward chasing.
Check out Serge Berger’s Trade of the Day for April 9.
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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