Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Trader’s Outlook for October 12, 2018: Volatility likely to persist as we dive into Q3 earnings next week

Weekly Market Review:

Global equity markets are rebounding from a two-day rout in what may be described, thus far at least, as a technical bounce. Not including this morning’s gains, over the past two days the Dow Jones Industrial Average (DJI), S&P 500 (SPX) and NASDAQ Composite (COMPX) all lost 5.2% of their value, while the Russell 2000 (RUT) sustained a ‘not as dismal’ 4.6% drop. From a technical perspective, all of these indices had a RSI (Relative Strength Index) close yesterday which was below 30, which generally suggests oversold territory – the DJI RSI closed at 26, SPX at 17, COMPX at 18 and RUT at 17. All of these represent the lowest RSI readings since August of 2015, when equity markets were under pressure due to global instability (triggered by a Greek default and a stock market crash in China).

So what are investors concerned about this time around? 10-year treasury yields (and mortgage rates) breaking out to seven-year highs is the most likely culprit, but there are also outstanding U.S./China trade concerns (and the potential impact that tariffs will have on corporate profits), inflationary pressures (in the form of wage growth, borrowing costs and raw material costs) and emerging market/currency instability. On a positive note, U.S. economic data continues to be robust, which is why interest rates have been in an upward trajectory in the first place. It might be too early to call this week’s “market correction” over, but today’s early Friday rebound across all of the major indices is a welcome start for the bulls.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Probability of Fed Rate Hike (10/12/18):

There are two more FOMC meetings this year, one in November and one in December, but really only the December meeting holds the possibility for a rate hike since the November meeting doesn’t have a follow-up press conference. As of this morning the Bloomberg probability of a December rate hike stands at 78.4%, which is down a couple ticks since Tuesday (likely due to the mid-week market sell-off), but is actually higher than last Friday’s 76.1% level.  

Current Probabilities:

Source: Used with permission of Bloomberg Finance L.P.

This Week’s Notable 52-week Highs:

Advanced Auto Parts Inc. (AAP + $4.70 to $165.74)

Air T Inc. (AIRT - $1.36 to $38.05)

Amarin Corp. (AMRN + $0.64 to $19.95)

Antero Resources Midstream LLC (AM - $0.44 to $32.78)

Atrion Corp. (ATRI + $6.80 to $704.80)

Berkshire Hathaway Holdings Class B (BRK/B + $1.36 to $206.56)

Eli Lilly & Company (LLY + $2.48 to $110.40)

EOG Resources Inc. (EOG + $1.08 to $122.70)

Express Scripts Holdings Inc. (ESRX + $1.08 to $94.82)

Greenbrier Companies Inc. (GBX + $0.11 to $60.11)

McCormick & Company Inc. (MKC + $0.55 to $132.22)

Murphy Oil Corp. (MUR + $0.31 to $35.77)

Pfizer Inc. (PFE + $0.71 to $43.53)

Supervalue Inc. (SVU + $0.43 to $32.47)

Yum Brands Inc. (YUM + $0.67 to $87.74)

Q3 Earnings Season

Third quarter earnings season essentially kicked off this week with large cap financials (JPM, C, WFC, PNC) taking center stage earlier this morning.

Ticker Symbol

Reported EPS

Consensus EPS Estimate

Difference

AZZ

$0.43

$0.47

-$0.03

HELE

$1.98

$1.59

+$0.39

FAST

$0.69

$0.67

+$0.02

WBA

$1.48

$1.45

+$0.03

DAL

$1.80

$1.74

+$0.06

JPM

$2.34

$2.26

+$0.08

WFC

$1.13

$1.17

-$0.04

C

$1.73

$1.66

+$0.07

PNC

$2.82

$2.72

+$0.10

Next week is going to be busy on the earnings front as Q3 earnings season moves into full gear. Below are some of the higher-profile companies that are scheduled to report.

Monday: BAC (before market open)

Tuesday: JNJ, UNH, GS, MS, BLK (before market open); NFLX, IBM, CSX, UAL, LRCX (after market close)

Wednesday: ABT, USB, ASML (before market open); CCI, URI, STLD, AA (after market close)

Thursday: NVS, SAP, DHR, TRX (before market open); PYPL, ASP, ISRG, CP (after market close)

Friday: PG, HON, SLB, VFC (before market open)

Volatility:

It’s not uncommon to see a volatility “flare-up” every couple of months but this week’s spike in the VIX is the second biggest move over the past two years. After closing at a relatively elevated 15.95 on Tuesday, the VIX surged to an intraday high of 28.84 on Thursday, which represents the highest levels since February of this year. It’s settling down a bit today on the rebound in the stock market but should still be considered “on watch” as long as it remains above 20.00. Looking out to the VIX futures, the term structure has moved from contango to backwardation with values ranging from 20.26 (10/17 expiration) to 17.75 (12/19 expiration) over the next couple of months.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Technical Outlook:

S&P 500 Index ($SPX): Today’s market rebound has lost some steam throughout the morning as the SPX is currently up only 21 after opening higher by 41 points at the open. This week the SPX dropped below its 50-day, 100-day, and 200-day Simple Moving Averages (SMA) which is significant from a technical perspective.

From a bullish perspective regarding this week’s sell-off, you probably want to see markets experience a sharp, swift correction, rather than a gradual drawn-out sell-off which is likely more characteristic of a change in trend. It doesn’t appear like the 200-day SMA (2,766) is going to provide the same level of support that it did back in February, Mach, April and May of this year, so the next support level appears to be ~2,700 where the index found buyers back in late June.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Dow Jones Industrial Average ($DJI): Similar to the S&P, the Dow is currently below its 200-day SMA, though by not as much. Looking ahead, if the Dow’s 200-day SMA doesn’t hold up like it did back in late June, look for support at the 24,000 level followed by 23,500:

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell 2000 Index ($RUT): From a technical perspective the RUT is the worst off among all of the major U.S. indices and is over 5% below its 200-day SMA at the time of this writing. Therefore, look to the 1,500 level where the index found buyers back in March and April earlier this year.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

NASDAQ Composite ($COMPX): The NASDAQ looks similar to the SPX/DJI with ~7,000 being the next level of support:  

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

10-Year Treasury Yields ($TNX): Yields on the 10-year pulled back modestly this week from the seven-year (intraday) high of 3.248% that was hit last Friday. The modest pullback took yields back down to test the ~3.115% level which was the old high from back in May. Assuming this pullback holds, it appears that a relatively steep uptrend started back in mid-August but we will have a better sense based on the price action next week. 

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Economic Recap:

There was an average amount of economic reports this week and the consensus appears to be a modest bearish-bias based on the number of reports that missed expectations. Let’s walk through the individual data points:

Better than Consensus Estimates:

  • Wholesale Inventories: +1.0% vs. +0.8% est

In-Line with Estimates:

  • Producer Price Index (PPI): +0.2% vs. +0.2% est
  • Core Producer Price Index (PPI): +0.2% vs. +0.2% est
  • Import Prices (ex-oil): 0.0% vs. 0.0% est

Worse than Consensus Estimates:

  • Initial Jobless Claims: 214K vs. 205K est
  • Consumer Price Index (CPI): +0.1% vs. +0.2% est
  • Core Consumer Price Index (CPI): +0.1% vs. +0.2% est
  • Crude Inventories: +5.99M vs. +2.17M est
  • University of Michigan Consumer Sentiment (preliminary): 99.0 vs. 100.00 est
  • Import Prices: +0.5% vs. +0.2% est

Key takeaways from this week’s data:

  • The +1.0% gain in Wholesale Inventories represents the largest jump since 2013
  • The PPI increased 2.6%and the Core PPI increased 2.9% year-over-year
  • The CPI increased 2.3% on an annual basis, which is down from the +2.7% for the twelve months ending in the prior month

Here’s a look at next week’s line-up:

  • Monday (15th): Business Inventories, Empire Manufacturing, Retail Sales, Retail Sales ex-auto
  • Tuesday (16th): Capacity Utilization, Industrial Production, NAHB Housing Market Index, Net Long-Term TIC Flows
  • Wednesday (17th): Building Permits, Crude Inventories, Housing Starts, MBA Mortgage Applications Index
  • Thursday (18th): Continuing Claims, Initial Jobless Claims, Leading Indicators, Natural Gas Inventories, Philadelphia Fed Index
  • Friday (19th): Existing Home Sales

In terms of potential market-movers next week, I’ll be monitoring Monday’s Retail Sales report to gauge consumer spending behavior and the numerous housing data points to see how the recent rise in mortgage rates is affecting new home buyer sentiment.   

Summary:

Rising rates sends stock investors to the exits this week. While volatility will likely persist in the near-term, the bias appears to favor the bulls.       

All of the major U.S. indices are well off this morning’s highs but still in positive territory at the time of this writing (1:39 PM ET) with the Dow Jones Industrial Average (DJI) up 17 to 25,070, the S&P 500 (SPX) higher by 8 to 2,736, and the NASDAQ Composite (COMPX) tacking on 80 to 7,410. Volatility is still very much alive and it’s being reflected in the VIX, which has moved into positive territory at the time of this writing (VIX + 0.50 to 25.48). I expect volatility to continue into next week, and perhaps a re-test of Thursday’s intraday lows and/or an SPX 2,700 test is in order, but ultimately I think the probability is that the bulk of the selling is likely over in the near-term.

However, next week we are going to get a slew of earnings reports from a broad range of industries and the big question mark is what they are going to say in terms of forward guidance. Are tariffs and potentially higher wages, raw material and borrowing costs going to put pressure on margins? We’ll have to wait and see. Having said that, I think the outlook favors the bulls based on history (extreme RSI with most indices sitting around the 200-day SMA) and my outlook for next week is therefore volatile and bullish.

   

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

Futures trading carries a high level of risk and is not suitable for all investors. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

(1018-8LLW)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.