Thursday, October 25, 2018 - Insight after the bell from Investopedia's Editor in Chief
*Currency markets and Bitcoin trade 24 hours, the figures here indicate movements between 9am and 4pm ET #1 Stocks whipsaw but expect volatility ahead
The wild ride continues for the markets. The Dow roared back up 400 points after losing over 600 points yesterday while the S&P 500 and the Nasdaq jumped significantly too. You can partly thank the blockbuster Microsoft and Tesla earnings last evening for turning the tide. But investors picking up bargains and short-covering could potentially also have played a role.
Today was another big day for earnings with some of the largest listed companies reporting, but the numbers don't look pretty.
Amazon shares tumbled nearly 5% in after hours trading as the company disappointed on revenue numbers with $56.6 billion in Q3 versus $57.1 billion estimates, though it did manage to trounce the EPS estimates.
It was a similar story for Alphabet, which also saw a profit beat but narrowly missed on revenue. The stock was down a little over 4% after hours. Moreover, the company got some negative press today related to sexual harassment issues.
Higher prices of crude hit Southwest Airlines and the company saw its shares punished 7%. American Airlines shares, which were among the worst performing among airlines, got some wind beneath their wings and rose 7% despite a 48% drop in profits for the quarter.
Bad news just doesn't stop pouring in for Chipotle, which saw shares in the red after missing on same store sales.
On the brighter side of things, Snap reported a narrower than expected loss though smaller user growth can't be good news for the struggling social media company; Intel shares popped 6% after a earnings beat.
Despite much skepticism, Twitter came through and delivered solid Q3 earnings, so much so that investors rewarded the stock with a 13% jump in today's trade. Comcast saw both a top and bottom line beat as shares rose nearly 4%.
Why it Matters: Let's face it, there probably isn't one simple explanation for why the markets have behaved the way they have over the past few weeks. Yeah sure, rising yields and Fed interest rate hikes sent the indexes reeling in the past, but the markets behaved quite the opposite even as the Fed Vice-Chair called for more rate hikes today in a major policy speech.
Earnings and corporate guidance can offer direction for individual stocks and they become even more important when the stocks are index bellwethers like Amazon, Alphabet or Microsoft. A huge swing for shares in these companies can pull the markets in either direction. But it's just optics. Days like yesterday or today are not reasons to either drown in pits of despair or exude irrational exuberance.
We turn to Ben Carlson again for some context. He says that roughly 5% of all trading days see an all-time high while the rest of the 95% of days are spent in drawdowns. After yesterday's bloodbath he did the math on how many times a 10% correction for the S&P 500 has turned into a 20% drop or a bear market since 1928. He found that nearly 60% of the corrections did not lead to a bear market. He was also able to quantify the average drawdown and time frame that these cycles lasted for.
"The average correction which saw stocks drop 10% but not enter bear market territory was a drawdown of -14%, lasting 132 days from peak-to-trough. Bear markets in this time frame experienced a drawdown of -37% over 358 days, on average."
There you go.
Not that it's easy to withstand this vortex of volatility but you've got to dig your heels, hunker down and ride the storm.
Warren Buffett has great advice for investors faced with volatility:
"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
Buffett's mentor and the father of value investing Benjamin Graham is even more poignant-
"By developing your discipline and courage, you can refuse to let other people's mood swings govern your financial destiny."
What's Next: There's no reason to believe that today's party will last long and won't lead to a nasty hangover. Coming up over the next few weeks are other big-ticket tech earnings like Facebook and Apple and some important economic indicators of consumer spending and sentiment. Retailers Macy's, JCPenney, Target and Walmart report mid-November. Not only will those numbers shine light on the state of retailers; they could also be an indicator of what the holidays will look like.
Hang on tight!
Read More:
6 Large Caps That Can Rise in a Bearish Market
Amazon Projects Holiday Season Sales Below Wall St Targets
Stocks to Fall Another 10% Before Bottoming: Piper Jaffray Alphabet Misses Wall Street Revenue Estimates, Shares Fall
Snap Adds Fewer Users Than Expected As Redesign Pain Lingers Chart of the Day: Historical data might suggest an upside for the S&P 500
Our friends at the McClellan Market Report recently pointed out a rather illuminating chart comparing the S&P 500's 2015-2018 price action with the same length of time four years earlier, during the period of 2011-2014.
The chart displays very similar ebbs and flows for the index during the two time frames. Though in a lighter vein, the authors of the report compared two potentially market moving events, Hurricane Sandy and the election of Donald Trump which they refer to as Hurricane Donald.
Looking specifically at the month of October in 2014 and 2018, the McClellans point out:
"The October 2018 minicrash matched the price action of the October 2014 Ebola Panic, but for wholly different supposed reasons. The February 2018 minicrash matched a similar one in February 2014, but again with wholly different news stories to explain each episode. The two patterns show additional minor points of similarity. It is not just about the overall uptrending direction, but about the minor dance steps matching up from one period to the other. There must be other factors which matter, other than the items that the fundamentalists insist are the ones that matter."
Thursday saw a strong one-day rebound for the S&P 500, but will we see a real recovery like what happened in late 2014 after the Ebola panic subsided? That remains to be seen, but if history has anything to say about it, we could potentially be looking forward to significantly more market upside from here.  CONNECT WITH INVESTOPEDIA |
No comments:
Post a Comment