Last week the earnings from the large cap technology stocks shook the confidence of investors. The drop on Friday got the attention of most, but we can’t just blame tech, there was McDonalds, General Electric, Chipotle and others who missed revenue and bottom line earnings. We start the week with our eyes wide open, and the focus remains on earnings for the week. The most important announcement may be Apple on Thursday. The stock broke support on Friday closing at $609 breaking support and the uptrend line. Our focus for the week is to protect against the threat of further downside risk. We will approach it one day at a time.
We discussed last week how revenues have declined, i.e. lower sales, have been the issue for companies reporting earnings. This consistent thread running through all the reports has worried investors. So far 41% of companies reporting have beat earnings expectations, and 59% have missed on some part of the report. That is a confirmation of the slowing economic data over the last 3-5 months and confirmation of the warnings heading into earnings for Q3. Rising prices in energy products have pinched profits and therefore we are seeing the results in each report announced. While the government measure of inflation may show no impact, the reality is showing up in the earnings releases and consumers discretionary spending. As a side note, I stopped in the grocery store on Sunday to grab a few items to grill… corn was 5 ears for $4! The impact of the drought is here.
Looking at two of the three major indexes we find the S&P 500 Index is sitting on the 50 day moving average, and the Dow Jones 30 Average likewise, is sitting on the moving average. This is one key issue to watch as we start the trading week, maybe they hold support and bounce. The alternative would be to start a trek lower on earnings and test the next level of support. Another 35 or so points on the S&P 500 and 2-300 points on the Dow would be a reasonable test to follow up last weeks drop. The pre-market futures for Monday are positive, but that can shift quickly. The start to the week could very well set the tone.
Small caps look more in tune with the NASDAQ on the downside as the growth stocks are leading the indexes lower. The index tested last weeks low and is looking at 452 support on the S&P 600 Small Cap Index. The trend off the September high has been clearly lower and this could be the sector that helps lead the downside short term along with semiconductors. The SOX closed below last weeks low and at the next potential support of 364. Both sectors are setting up for more downside opportunity.
The leadership or what was leadership is where we will focus our attention for more insight to the next move for the overall market. The big names like Apple, Google, Amazon, IBM, GE, McDonald’s, etc. will continue to set the tone short term. Watch how they respond this week following notable drops. Housing… still looks solid and held up nicely on the week. Industrials (XLI) are holding within the trading range. Materials (XLB) gave back some of the gains, but holding up within the trading range. Energy (XLE) is volatile, but okay as it holds the uptrend line. Retail (XRT) stock picking sector plain and simple. This is a story of the have’s and the have not’s. Testing support at $62 currently. And, financials (XLF) are volatile, but still providing some key leadership for the broad markets. Watch for them to hold support and remain within the current trading range. If they break lower the broad markets will test the next levels of support.
Watch as the week unfolds. Set your stops at the levels that comply with your risk and objectives for each position. You should have built your cash position back up over the last couple of weeks and you are now ready to take advantage of whatever opportunities the market provides on the upside or the downside.