Quarterly earnings reports will soon start coming out at a rapid-fire pace. Some on Wall Street have labeled this time period as “earnings roulette season.” In my opinion, this is an appropriate description in light of the volatility that may occur at the same time. However, contrary to what we have seen with equity market indices thus far in 2018, I think the odds favor an increase in stock-specific volatility as opposed to equity market volatility. Since corporate fundamentals drive long-term price movement, how the equity market interprets these specific corporate earnings reports, including their forward guidance, will go a long way in discerning how extreme stock-specific volatility will get.

What does this mean to you? In my opinion, this means that it is prudent to have an unemotional, objective investment process that includes 1) a thorough review of what positions are owned and why, and 2) a predetermined plan to manage risk. This includes taking profits, either in part or whole, and cutting losses.     

Within the context of preparing for “earnings roulette season,” I believe the odds favor that the S&P 500 is carving out a wide trading range pattern that could last for a period of months/quarters. This period would include many bouts of selling pressure (declines/pullbacks) as well as upside probing (rallies). I have highlighted the extreme ends of this trading range in the chart below. For the more tactical investor/trader, I’ve also listed areas of selling pressure (resistance) and buying interest (support).  

S&P 500: Monthly chart (each vertical bar represents a 1 month period). "Bull moves" (green arrow) followed by lengthy consolidation periods (horizontal blue line) has been normal since the 2009 bottom. 

Algorithmic trading and “tweeting” has lent itself to an equity market environment that can best be described as “extremely fluid.” Thus, we will continue to share our insights. Please know that Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies.  

Art Huprich, CMT
Chief Market Technician
Day Hagan Asset Management

—Written on 04.16.2018. Chart sources:

Printable PDF copy of article: Day Hagan Tech Talk April 17, 2018 (PDF)

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