On Wednesday, stocks plummeted after several days of hesitation on the charts. My market view is that traders appear to be looking more for reasons to sell than to buy.
With the S&P 500 at its highest level since 2008, I expect to see some hesitancy. My market view is that stocks have had an amazing run so far this year and could pause.
Triggering the selling on Wednesday was the non-response by the Federal Reserve on additional stimulus (aka QE3). The Fed appears to be content with what it has done so far, but at the same time warned that the jobs growth may stall should the economic renewal pause.
The private ADP jobs report was softer than expected, which in my market view may signal a soft non-farm payrolls on Friday with jobs growth estimated at 200,000 jobs, down from 227,000 in February. For a healthy jobs market, you want to see job creation at around 500,000 monthly. I still have concerns towards the jobs market, which I discussed in Don’t Tell the Unemployed the Good Times are here. (PC031212)
The risk in the eurozone is also prevalent, with speculation of another recession looming. Spain received a poor response to its bond auction. With a high unemployment rate and muted growth in Spain, things will not be easy in my market view.
The Chicago Board Options Exchange Market Volatility Index (VIX)—a measure of option volatility for the S&P 500 often known as the “fear gauge”—remains low at around 16. This is the lowest level since May 2011, when the S&P 500 was trading around the 1,350 level. A low VIX reading may indicate that traders are too lax and represent a contrarian signal of pending weakness.
Note the inverse relationship of the VIX and S&P 500 since October 2011. Should the VIX rise, we could see a corresponding decline in the S&P 500.
Chart courtesy of www.StockCharts.com
The current valuation is reasonable in my market view, but the degree of the buying is overdone.
All eyes will be focused on the first-quarter earnings season, which will begin with Alcoa, Inc. (NYSE/AA) reporting on Tuesday.
The news doesn’t look promising for earnings at this juncture. Based on the current estimates, earnings growth is estimated to be 3.2% for the first quarter, following 9.2% growth in the Q4, according to Thomson Reuters. The Q1 reading tends to be low, but should move higher as earnings are reported. Earnings growth in the Q2 is estimated at 9.2%.
The two top-performing earnings expected for the Q1 are Industrial’s (+10.3%) and Financials (+8.3%). Technology (+16.8%) was the second top gainer in the Q4. The two weakest areas of earnings growth in the Q1 are expected to be the same as the Q4: Telecom (-14.1%); and Materials (-15.6%).
It’s going to be an interesting few weeks ahead of us. If earnings don’t deliver, my market view is that stocks may be stuck on the charts.
And don’t forget there’s a historical pattern that suggests traders move away from stocks in May and come back in the fall for the best results.
My suggestion is to use put option as hedge protection and write short-term covered call options to generate some premium income should markets stall.