The last time the stock market got off to such a hot start, Bill Belichick was a defensive coordinator for the New York Giants, on his way to his first Super Bowl rings, while Tom Brady was just a 10-year old schoolboy.
What’s been the catalyst for stocks during this rally that’s seen the Russell 2000 index rise by more than 10% over the month of January?
Well, by order of deduction it’s NOT:
- The Government (it was shut down for nearly the whole rally)
- Trade Talks (no deal yet between the US and China)
- Corporate Earnings (giants like Apple, Amazon, and Nvidia guided lower)
That said, the credit for the recent stock market rally has to go to the FOMC, and the Fed Chairman, Jerome Powell.
You see, if you want to get a hold of what direction the market is headed, you need to look at the big picture, and the players who move the pieces. That’s why I’ve been diligent with you about the Fed, as I’ve covered them here, here, and here, for you in the past.
Now, for most folks, this stuff is boring…As for me, I study macro-variables, the volatility regime (make sure to check out Day 20 of this 30 Days to Option Trading eBook), and other economic catalysts… because I like money.
That said, we’ve got an important week for stocks lined up, with earnings coming out of Alphabet, Disney, Twitter, and GM to name a few.
The big question is: Can stocks continue this rally or do we fizzle out in February?
Thoughts on the Market
This market environment is very reminiscent of last year…
The entire market rallied to kick off January 2018… euphoria was in the air and it seemed like traders were having the best months of their lives…
Then February hit. There was a lot of risk on the table at the time. You see, the Federal Reserve met in the week prior to the historic selloff (the Dow plummeted 1,500 points and suffered its single largest intraday fall in history)… the Federal Open Market Committee (FOMC) noted that inflation was on the rise, and the U.S. government reported that hourly earnings rose 2.9% in January 2018.
That said, investors and traders went from euphoric to panic mode. Additionally, there was a ton of political risk between the U.S. and China.
Check out the hourly chart of the SPDR S&P 500 ETF (SPY) between January and February 2018.
Not only that, the CBOE Volatility Index (VIX) – which measures the S&P 500 Index’s expected volatility over a 30-day period – was near historic lows to kick off 2018…
When volatility is extremely low, you’ve got to be thinking, “Is the market too complacent and greedy here?”
Let me break it down for you.
The market was extremely complacent and greedy in January 2018. You see, traders kept buying highs even though there were a number of potential negative catalysts.
Not only that, you had some traders out-right shorting volatility without hedging their positions. Think about it like this… the VIX fell to 9 – near historic lows – and traders were still shorting volatility. It’s like shorting a stock at historic lows and not knowing the potential catalysts that can drive it higher.
Well, here’s what happened with the VIX…
Volatility more than doubled between February 5 and February 6, 2018… This led to the downfall of one heavily-traded exchange-traded note (ETN) – the VelocityShares Daily Inverse VIX Short-Term ETN (XIV). Now, XIV no longer exists because the issuer redeemed the ETN due to the fact it lost more than 80% of its value.
Don’t get me wrong though… there are a time and place to short volatility, but you need to understand the asset class, as well as option trading before you just start placing bets that volatility will fall.
But how does this help us today?
Keep in mind, I’m not saying the same thing that happened during the first week of February 2018 will happen this year… However, I do expect things to get a little more volatile.
Here’s a look at VIX in 2019 so far…
It’s been on a steady decline for the most part.
That said, market participants may start to get too complacent, as we’re already witnessing in SPY.
You might be wondering, “What are the potential risks on the table?”
Potential Market Risks
Let’s just face the facts. Things aren’t going well with growth… Just last month, the International Monetary Fund (IMF) cut its global growth forecast and warned of U.S. – China trade war and Brexit risks.
Not only that, we’ve witnessed large companies like Apple Inc. (AAPL), Amazon.com Inc (AMZN), Nvidia (NVDA), and American Airlines (AAL) cut their guidance. Not many large companies came out and said they’re going to raise their guidance.
Moreover, we’ve seen some rotation into safe-haven assets like gold and bonds. You see, when investors and traders are fearful of volatility, they tend to focus on assets that thrive on volatility – gold, gold exchange-traded funds (ETFs), and bond ETFs.
Not only that, there are some economic indicators, as well as corporate earnings to be mindful of this week.
Economic Calendar
- Monday, February 4, 2019
Motor Vehicle Sales
U.S. Government Shutdown Update
Factory Orders at 10:00 AM ET
Loretta Mester Speaks at 7:30 PM ET - Tuesday, February 5, 2019
ISM Non-Manufacturing Index at 10:00 AM ET - Wednesday, February 6, 2019International Trade at 8:30 AM ET
Productivity and Costs at 8:30 AM ET
EIA Petroleum Status Report at 10:30 AM ETJerome Powell Speaks at 7:00 PM ET (Just last week Powell moved the markets… let’s see what he says this day.)
- Thursday, February 7, 2019
Jobless Claims at 8:30 AM ET
EIA Natural Gas Report at 10:30 AM ET
Fed Balance Sheet at 4:30 PM ET
James Bullard Speaks at 7:30 PM ET - Friday, February 8, 2019
No notable economic catalysts
This brings us to the corporate earnings calendar.
Earnings Calendar
Note: Companies with an EPS estimate with parentheses around them indicates analysts are expecting an earnings loss.
- Monday, February 4, 2019
Earnings Before Market Open
SYSCO Corp. (SYY) expected to report at 8:00 AM ET (EPS estimate: $0.72, revenue estimate: $14.85B)
Alexion Pharmaceuticals (ALXN) expected to report at 6:35 AM ET (EPS estimate: $1.82, revenue estimate: $1.06B)
Clorox Co. (CLX) expected to report at 6:30 AM ET (EPS estimate: $1.32, revenue estimate: $1.48B)
Earnings After Market Close
Alphabet Inc. (GOOGL) expected to report at 4:05PM ET (EPS estimate: $11.08, revenue estimate: $31.28B)
Gilead Sciences Inc (GILD) expected to report at 4:00 PM ET (EPS estimate: $1.64, revenue estimate: $5.52B)
Seagate Technology (STX) expected to report at 4:05 PM ET (EPS estimate: $1.27, revenue estimate: $2.74B)
- Tuesday, February 5, 2019
Earnings Before Market Open
Viacom Inc. (VIAB) expected to report at 7:00 AM ET (EPS estimate: $1.02, revenue estimate: $3.10B)
BP PLC (BP) expected to report at 5:25 AM ET (EPS estimate: $0.77, revenue estimate: $60.72B)
Ralph Lauren Corp. (RL) expected to report at 8:00 AM ET (EPS estimate: $2.14, revenue estimate: $1.67B)
Aecom Technology (ACM) expected to report at 6:55 AM ET (EPS estimate: $0.52, revenue estimate: $5.06B)
Estee Lauder Companies (EL) expected to report at 6:45 AM ET (EPS estimate: $1.53, revenue estimate: $3.92B)
Earnings After Market Close
Walt Disney Co. (DIS) expected to report at 4:05 PM ET (EPS estimate: $1.57, revenue estimate: $15.18B)
Electronic Arts (EA) expected to report at 4:00 PM ET (EPS estimate: $1.93, revenue estimate: $1.76B)
Skyworks Solutions (SWKS) expected to report at 4:15 PM ET (EPS estimate: $1.85, revenue estimate: $975.05M)
Anadarko Petroleum Corp. (APC) expected to report at 4:10 PM ET (EPS estimate: $0.57, revenue estimate: $3.49B)
Allstate Corp. (ALL) expected to report at 4:45 PM ET (EPS estimate: $1.01, revenue estimate: $8.71B)
Chubb Corporation (CB) expected to report at 4:05 PM ET (EPS estimate: $1.93, revenue estimate: $7.72B)
Shutterfly Inc. (SFLY) expected to report at 4:00 PM ET (EPS estimate: $5.35, revenue estimate: $962.73M)
- Wednesday, February 6, 2019
Earnings Before Market Open
Take-Two Interactive (TTWO) expected to report at 7:00 AM ET (EPS estimate: $2.72, revenue estimate: $1.46B)
General Motors Corp. (GM) expected to report at 7:30 AM ET (EPS estimate: $1.21, revenue estimate: $37B)
Spotify Technology (SPOT) expected to report at 6:30 AM ET (EPS estimate: ($0.24), revenue estimate: $1.70B)
Eli Lilly & Co. (LLY) expected to report at 6:25 AM ET (EPS estimate: $1.36, revenue estimate: $6.34B)
First Data Corp. (FDC) expected to report at 6:50 AM ET (EPS estimate: $0.37, revenue estimate: $2.19B)
Earnings After Market Close
Chipotle Mexican Grill (CMG) expected to report at 4:10 PM ET (EPS estimate: $1.37, revenue estimate: $1.19B)
Match Group Inc. (MTCH) expected to report at 4:30 PM ET (EPS estimate: $0.38, revenue estimate: $447.79M)
iRobot Corp. (IRBT) expected to report at 4:00 PM ET (EPS estimate: $0.51, revenue estimate: $378.98M)
NXP Semiconductors (NXPI) expected to report at 8:00 PM ET (EPS estimate: $2.08, revenue estimate: $2.39B)
O’Reilly Automotive (ORLY) expected to report at 4:30 PM ET (EPS estimate: $3.75, revenue estimate: $2.33B)
Metlife Inc. (MET) expected to report at 4:15 PM ET (EPS estimate: $1.30, revenue estimate: $16.33B)
Prudential Financial (PRU) expected to report at 4:20 PM ET (EPS estimate: $2.88, revenue estimate: $14.03B)
- Thursday, February 7, 2019
Earnings Before Market Open
Twitter Inc. (TWTR) expected to report at 7:00 AM ET (EPS estimate: $0.25, revenue estimate: $871.59M)
Philip Morris International (PM) expected to report at 7:00 AM ET (EPS estimate: $1.16, revenue estimate: $7.32B)
WWE (WWE) expected to report at 8:30 AM ET (EPS estimate: $0.32, revenue estimate: $252.90M)
Tyson Foods Inc. (TSN) expected to report at 7:30 AM ET (EPS estimate: $1.55, revenue estimate: $10.36B)
T-Mobile US (TMUS) expected to report before market open (BMO) (EPS estimate: $0.69, revenue estimate: $11.41B)
Alliance Data Systems Corp. (ADS) expected to report at 7:30 AM ET (EPS estimate: $7.03, revenue estimate: $2.12B)
Dunkin’ Brands Group Inc. (DNKN) expected to report at 6:00 AM ET (EPS estimate: $0.62, revenue estimate: $329.78M)
Cardinal Health Inc. (CAH) expected to report at 6:55 AM ET (EPS estimate: $1.09, revenue estimate: $36.25B)
Yum! Brands Inc. (YUM) expected to report at 7:00 AM ET (EPS estimate: $0.97, revenue estimate: $1.59B)
Earnings After Market Close
Expedia Inc. (EXPE) expected to report at 4:00 PM ET (EPS estimate: $1.10, revenue estimate: $2.54B)
- Friday, February 8, 2019
Earnings Before Market Open
Phillips 66 (PSX) expected to report at 7:00 AM ET (EPS estimate: $2.76, revenue estimate: $30.05B)
In addition to all of these upcoming catalysts, we’ve got the State of the Union address being held on Tuesday, we’ll see if stocks can keep their positive momentum.
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