It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...
Charles Dickens’s iconic tome illustrates aptly the interplay between earnings news and economic news of late. Every day it seems good earning news is paired with slowing economic news and vice versa. Recent market volatility has pushed cautious investors to the sidelines and those that remain are riding the markets up and down with each headline.
…it was the epoch of belief, it was the epoch of incredulity,
Equities are down 0.2 percent this week, the benchmark 10-year treasury yield rallied above 3 percent but finished the week at 2.94 percent relatively unchanged. The dollar continued its run to 1.19 EUR/USD, up 2 percent for the week.
…it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair
The week started with what normally would be cause for a rally with McDonald’s (MCD) beating earnings estimates and the rumor of a potentially huge telecom merger between T-Mobile and Sprint, yet equity markets sold off, testing their 50-day moving averages. Wednesday’s market started higher on Apple’s great earnings numbers but shortly after the FOMC statement was released, the equity markets took an “about face” and rolled over sharply. Investors seemed concerned that moderate growth might not match the Fed’s interest hike schedule.
...we had everything before us, we had nothing before us…
The week closed with the U.S. unemployment rate falling to 3.9 percent, as the country added 164,000 new jobs, less than the 188,000 economists forecasted. While the number of new jobs failed to live up to economist’s predictions, equity markets rallied on Warren Buffet’s rising Apple ownership. Recent market moves are swinging on “hot and cold” news.
A Triangle - What Market Indecision Looks Like
The above chart is the S&P 500, used to represent broader equities with what market technicians call a “triangle pattern” forming. Chart patterns are simply an attempt to graphically explain the psychology of the market.
From the left, you see the late stages of a market rally from the end of 2017 through February of this year. If you remember, all signs were positive and all news was good news through the fourth quarter of last year. Exuberance was high, and the economy and stocks were backing it up.
At the end of January, inflation fears caused equities to roll over and erase all the gains for the year, introducing volatility again. Now news stories about market risk and pullbacks are filtering to the top and equities are selling off even more until support is found. Institutional money starts buying at depressed levels setting a floor (bottom line on the triangle). This becomes a psychological support that will likely be tested over the next few months.
With that support as a base, you sprinkle more good earnings and a dash of GDP acceleration and you have a recipe for continuing the rally—just with more volatility. As the next leg upward continues into March, investors should get comfortable dipping a toe into the market again. As the market starts back toward its most recent high, those that bought will look to realize their gain, and the market may fall back to the floor again.
"Wash, rinse and repeat" a few times and here we are. That support line is still being bought on good news, but the highs continue to be lower. As stated earlier, technicians call this a triangle. That begs the question: what happens at the triangle’s vertex? Answer: One side wins. Triangles are usually a continuation pattern, meaning that this pattern served to help investors get comfortable after a run-up and when investors are comfortable the market resumes. Traditionally, the market breaks out of the pattern when sellers capitulate, or buyers step up. This comes in the form of a “blow out day” when 90 percent of stocks are down (capitulation) or 90 percent of stocks are up (buyers stepping in). The problem is, we haven’t seen these signs yet.
On occasion triangles turn down rather than up as they near their vertex. This occurs opposite a break out — usually, lower volumes and lack of investor participation leads the market to selloff. Harbingers of this bad news could be the S&P 500 breaching it’s 200-day moving average and a jump in the CBOE VIX (volatility measure) back to levels seen in February (the start of the triangle).
There is no shortage of economic, geopolitical and earnings news that could be the catalyst for the market to break this triangle pattern, but so far none have. As the spread of the triangle continues to diminish, we believe the market will break out to the upside.
Takeaways for the Week
- Unease in the market has investors considering selling in May and going away
- There is plenty of good news if you are a bull, plenty of reasons for concern if you are a bear