Fed Meeting Offers a Glimmer of Hope for Bulls

Earnings season has yet to provide the big stock market boost many were anticipating

Senior Vice President of Research
Apr 30, 2018 at 8:40 AM
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"...something that has grabbed my attention when listening to a long line of guests on financial television during the past few weeks is the near-consensus opinion that earnings will drag stocks out of their recent funk... as a contrarian, I am reluctant to buy into the consensus here. Friday's poor earnings reactions out of the bank sector may be enough to convince you not to buy into this consensus thinking, either."
-- Monday Morning Outlook, April 16, 2018

"The long-awaited surge in corporate earnings and broad economic growth, which for many years seemed to be a distant hope, now appears to have arrived... And the surge comes at a time when investors are parsing a wide variety of fears, from geopolitical concerns to rising inflation. On Tuesday, that unnerved stock investors, who are finding that strong earnings increasingly aren't enough to push stocks higher."
-- The Wall Street Journal, April 25, 2018

Last week was the start of earnings season kicking into high gear, with multiple companies across a variety of industries reporting earnings -- quite a few of which were spectacular, as many stock market participants expected. "As many stock market participants expected" is the operative phrase in the prior sentence, as the market remains in neutral even as earnings reports and earnings beats charge ahead.

If you are trading with a one- or two-day holding period, last week's action might have been appealing. There were 11.65 points of movement from the April 20 close to Wednesday's intraday low to Friday's closing price that yielded a net gain of 0.19 point on the SPDR S&P 500 ETF Trust (SPY - 266.56). Another group that was happy with last week's action is index and equity exchange-traded fund (ETF) option premium sellers, given that the Cboe Volatility Index (VIX - 15.41) declined as the SPY, iShares Russell 2000 ETF (IWM - 154.69), and PowerShares QQQ Trust (QQQ - 162.09) were flat for the week.

There has been earnings-inspired directional movement among individual equities. But for every Netflix (NFLX), Visa (V), Facebook (FB), Boeing (BA), or United Continental (UAL) that responded considerably well to earnings, there has been an Alphabet (GOOGL), JPMorgan Chase (JPM), eBay (EBAY), Caterpillar (CAT), and Teradyne (TER), whose shares were knocked down significantly after their respective reports. As it stands now, with a full slate of earnings still due in the next couple of weeks, earnings have not provided the impetus that some bulls were looking for as the catalyst to move equities out of their doldrums.

A week ago in this space, I discussed in detail the technical backdrop of key equity indexes and ETFs. A support level I discussed came into play early last week on a sell-off that shook some investors, as the SPY 200-day moving average marked the lows once again. In fact, bulls and bears on Wall Street continue to wage battle, even as North Korean and South Korean leaders announced in a summit last week their plans to end war. Please refer to that April 23 commentary for key levels to focus on in the days and weeks ahead.

spy daily with 80-day and 200-day moving averages

Geopolitical uncertainties are still present, such as the possibility of Trump pulling out of the Iran nuclear deal and full nuclear disarmament in North Korea a lingering question. Investors are also focused on the threat of trade tariffs and NAFTA negotiations, in addition to uncertainty regarding the Fed's pace of rate hikes.

In fact, another Federal Open Market Committee (FOMC) policy meeting is scheduled for this Wednesday. There is a glimmer of hope for bulls with respect to this meeting, if the 93% probability that fed funds futures traders are placing on the Fed to hold rates steady proves correct. As I displayed for you last week and again below, during the current tightening cycle that began in December 2015, the SPY has behaved much better in the short term in the immediate aftermath of the Fed holding rates steady relative to hiking rates.

spy one month after fed meetings

"Call it the running of the bears. With equities almost three months removed from the last record, Americans have grown less optimistic that the market will bounce back. For the first time since Donald Trump’s shock election in November 2016, a majority of consumers expect stocks to be lower 12 months from now, according to the latest sentiment reading from the Conference Board. "
-- Bloomberg, April 24, 2018

"Investors are dumping U.S. stock funds at one of the fastest paces in a decade as rising market turbulence erodes confidence in the nine-year-old bull market. U.S. equity mutual funds and exchange-traded funds recorded $2.4 billion in outflows for the week ended April 18, according to the Investment Company Institute. That followed $41 billion in outflows from these funds in February -- the biggest monthly exodus since January 2008, ICI data show. Overall, investors have yanked $67 billion out of these stock funds since the start of February."
-- The Wall Street Journal, April 26, 2018

The triangle pattern that the SPY is in tends to be a continuation pattern in technical analysis -- implying the next move would be to the upside, since this is the longer-term direction of the equities during the last few years. However, I ran across yet another sentiment statistic last week on Bloomberg that suggested retail investors do not believe the next major move will be higher, per the factoid above. This builds on other similarities in the sentiment landscape relative to November 2016 that I shared with you last week. The negative sentiment expressed in that Conference Board survey is playing out in U.S. stock fund outflows since the February lows.

As such, the sentiment backdrop supports higher stock prices. However, if this year's lows are taken out, it becomes a matter of price action supporting the sentiment backdrop, therefore downgrading the significance of negative sentiment being a supportive factor for equities.

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