The new earnings season coupled with the coronavirus fearmongering is certainly contributing to a choppier tape. As a result, gold and U.S. Treasuries have been rallying. Both can be a good hedge. When the volatility genie escapes the bottle, it is hard to get him back in. A rise in volatility typically begets more volatility, at least in a short-term perspective.
Everyone is looking at the price action of the indexes for a clue if a correction is coming. The problem with this approach is that the indexes are lagging indicators.
The biotech ETF which was among the first ones to break out and lead this rally in October is now among the first ones to break below its 50-day moving average. 89-90 is a huge level for XBI and if it doesn’t hold, we might be in for a lot more volatility.
Of course, this might be just another sector rotation. On Friday, we saw enterprise software stocks showing clear relative strength. MDB, TWLO, EVBG, PLAN, and others were green in an ocean of red. It can be due to the strong earnings report from Atlassian (TEAM) or it can be because of a bigger industry-wide reason. We will know soon enough.
1. The small-cap index, Russell 2000 had a big breakout. Small caps are trying to catch up with large caps, which many of which have been making new all-time highs every week in the past three months. For Russell 2000 to catch up with the S&P 500 and the Nasdaq 100, it will need some heavy lifting from energy and financial stocks which are still lagging for the most part.
2. The highest-shorted stocks outperformed again. So many stocks with high short interest continue to squeeze higher: CGC, TLRY, TSLA, LK, PETS, SHAK. Some potential candidates for the next week: DDOG, PTON, INMD, STNE.
3. The earnings season has just begun. So far, a few big banks and a few semiconductor companies reported. Starting next week, it gets a lot more interesting as companies like NFLX, SBUX, INTC, and TEAM.
We also talked about the impact of tariffs on semiconductors and why AMZN is lagging the other mega caps.
The market continues to climb a wall of worry. There were solid reasons to see a more significant pullback last week due to the escalation in the Middle East. The market barely blinked. We just saw another sector rotation, which this time benefited the enterprise software sector.
Granted, there are some signs of momentum exhaustion and I would not be surprised to see a short-term consolidation but for the most part, dip buyers are still in control and pullback are buying opportunities.
The new earnings season starts this week with the big banks reporting – JP Morgan, Bank of America, Goldman Sach. As usual, the market reaction will matter more than the actual numbers.