Optimism Fades As Investors Worry Earnings Are Hitting Their Peak

Wednesday, April 25, 2018, 10:38 AM, EST

  • NASDAQ Composite -0.20% Dow -0.22% S&P 500 -0.19% Russell 2000 -0.14%
  • NASDAQ Advancers: 811 Decliners: 1276
  • Today’s Volume (100 day avg) +16.4%

Yesterday’s optimistic start faded away as investors feared that earnings are at a peak. Asian and European markets followed the US lower overnight, and the weakness continues this morning with the major indices and most sectors in the red though we are well off the initial lows. Energy (-0.6%) leads to the downside and Tech (-0.4%) isn’t far behind while Staples (+0.2%) is the only positive sectors. Market volumes were above average yesterday for the first time in two weeks and is off to a strong start today. Lastly gold is off 0.8% while the dollar index continues higher with a 0.4% advance.

  • It’s been quite a first quarter earnings season so far. We have seen earnings growth of more than 18% and an 80% beat rate yet the markets are little changed since the beginning of the season. Companies that have topped estimates have seen just a 0.1% gain in the 2 days after reporting well below the average of 1.1% according to Factset. What gives, you ask beyond the obvious concerns of a trade war with China, the 10 year Treasury yield touching 3% and potentially a more aggressive Fed??? Well earnings reports are backwards looking meaning that further appreciation from tax cuts will begin to fade over time. It’s probably already priced into the market and investors are beginning to realize that a potential deceleration is ahead. Case in point Caterpillar’s statement that this quarter was probably a “high water mark” for the stock.

  • Yield on the ten year hitting the psychologically important 3% mark yesterday but interestingly rate-sensitive sectors Utilities and REITs both closed with gains, and BDCs closed flat. That suggest yesterday’s selling was not so much a reaction to higher rates, instead “the more obvious culprit is the very high starting equity valuations, the Fed tightening and strong earnings being discounted” says Evercore analyst Dennis DeBusschere.

  • Crude oil inventories rose last week by nearly 2.2 million barrels; gasoline has a small build while distillate stocks fell more than expected. The inventory build is the ninth in the past twelve weeks. Crude prices were flat ahead of the data release and have since weakened slightly with WTI off -0.4%.

Technical Take:

Equity markets are heavy again with ALL of the major indices and sectors starting today’s session in the red. Despite rates making new highs, the bond proxy staples and utility sectors have now turned positive. Staples are bouncing along the clearly defined support line we highlighted in yesterday’s BLOG. The S&P 500 index came within 3 points of its 200-day simple moving average (sma), now 2,609, which previously acted as a reliable support line back in February and March/April. This time however the 200-day sma (yellow line) looks much more vulnerable as the more a support line is tested the more likely it is to give way. A breakdown below it opens up a move to the 2018 closing low 2,580. The year’s intraday lows are not far below there at 2,554 and 2,533 (blue lines), with all three levels qualifying as “horizontal” support of the descending triangle pattern (a, b, c, d, e) forming since the January 26 high. However another possibility is a “zigzag’ ABC correction. We highlighted this possibility in the early April BLOG and noted the zigzag projects a measured move to 2,460, - 2,470 range which assumes the initial downtrend, wave A, equals C.

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Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information.

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors.

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq’s Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT is a Director on the Market Intelligence Desk (MID) at Nasdaq. Before joining Nasdaq Brian spent 16 years as an institutional trader executing equity and options orders for both the buy side and sell side. He also provided trading ideas and wrote technical analysis commentary for an institutional research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Transportation companies, among others, understand the trading in their stock. Brian is a Chartered Market Technician (CMT).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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