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Here we are in yet another week of the coronavirus pandemic and its impact on nearly every aspect of our lives...
The markets are clearly no exception as volatility continues to shake up not only the stock market, but also the bond, oil, and currency markets - the four areas that I look at to gauge where we are and where we're headed.
Now as you may know, I start out every Monday by looking at the S&P 500 ETF (NYSEArca: SPY). While it came down on Friday, we were able to see a big bump up on Monday.
One reason behind this is some of the positive news that came from New York Governor Andrew Cuomo about the situation stabilizing a bit in that state, which could lead to more investors getting back into the markets.
Of course, as has been true since this trouble started, you can't trust these rallies. Once that buying happens, the "smart money" will sell that enthusiasm because the reality of the situation is likely worse than the numbers indicate.
Moreover, Q1 earnings are going to be reported this week and will likely have an impact on the markets going forward.
So let's take a more detailed look at what's moving these markets and what you can do about it...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
This Week's Big Market Movers
In the midst of all this green, the sector that's not doing very well right now is oil.
Last Friday afternoon, the United States Oil Fund LP (NYSEArca: USO) was trading above $6. However, its price fell, and it's now trading near $5.50 at the time of writing.
This is due to the news that came out over the weekend that the deal between Saudi Arabia and Russia on limiting oil production will likely be postponed. This news is clearly shaking up oil markets again.
In contrast, the Nasdaq Composite is the strongest of the markets, and that's no wonder - technology is still going to be needed whether we're working in an office or at home, which many of us are doing now.
Now looking at the overall markets, I believe that SPY could drop to $220 in the near term, which is a 15% drop from its current $260 price. I'm basing this on the short-term signals that I'm seeing in the options and bonds markets.
As far as volatility goes, we're still seeing some angst and fear in the market. Currently, the VIX is sitting near 45, which is nowhere near as high as where it was about a month ago. It peaked at 82.69 just three weeks ago on Monday, March 16.
But the overall fear has continued to drop as markets move higher.
Meanwhile, the bond market hit its high as the stock market was free-falling at the beginning of March, but it hasn't stayed there.
That's because we saw a "garage sale" happening with stocks, bonds, foreign currencies, commodities, and cryptocurrencies. It seemed that everything was going out the door so investors could get the U.S. dollar.
Now everything is starting to correct itself as the bond market has started to move up again.
Then we have the currency market. I look at the Invesco DB USD/Bullish FD (NYSEArca: UUP), an ETF that tracks the U.S. dollar. This ETF moves at twice the speed of the U.S. dollar and is currently sitting at the $26-$27 range and slowly moving higher.
That's something to keep an eye on because if the U.S. dollar is going higher, that means someone is buying it. And they're doing so by getting out of stocks or borrowing.
If I were to sum up what I'm seeing right now, I would say that the stock market is making rebounds. The bond market is coming off, but ever so slightly. I think the bond traders are saying, "You know, I'm not quite sure I agree with this rally that's happening right now - I think it might be too soon."
The U.S. dollar and currency traders are agreeing with the bond traders. And the oil market is currently falling apart again.
There are some key events to watch to see where markets are headed. And one of them is earnings...
What to Make of Q1 Earnings
Earnings will start out with a dribble now - and then the faucet is going to be fully open next week.
But the question to ask is "What earnings are companies even going to be reporting?" No one knows what these earnings are going to look like.
I'm calling them Q1 "What Earnings?" A lot of these companies aren't going to have earnings, and they're not going to be able to give us any guidance as to where they're going to be heading in Q2.
Their guidance is all third quarter, fourth quarter, and first quarter of 2021. But they're not giving you any guidance about what's happening in the next quarter because they know it's going to be terrible.
What you need to do is take a second look at all your positions and estimate how bad these companies' Q1 earnings will be.
For example, one firm to keep an eye on will be Delta Air Lines Inc. (NYSE: DAL), which will likely announce earnings on Thursday, April 9. In fact, Delta is the only firm you need to be concerned with right now.
Delta has met its earnings estimates six out of the last seven quarters, but we all know that this quarter, it's going to miss. The question is how bad it's going to miss. That's what matters now.
Besides earnings, you need to look at the first hour of the day when trading opens to get a sense of what the market trend will be. Specifically, check out the tug of war between the stock and oil markets.
Other factors I'm watching are the COVID-19 reports coming from Governor Andrew Cuomo in New York - that plays into investor sentiment.
Also, it's important to watch how long it will take for small businesses to receive stimulus checks from the government, and the stipulations attached to the money received. A lot of positivity that translated to market movement stemmed from these stimulus measures, so disappointments will do the opposite.
And then for the rest of the month, you should expect markets to react against logic because investors are still going to be acting on emotion.
I'll be back later this week to show you more trades to play what's going on. Be sure to watch my Market Live stream later this week, where I'll be revealing two or three stocks that I think hold the highest probability of winning trades... So stay tuned and check in again tomorrow at 11 a.m.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.