Bank Earnings Continue As Market Rally Stalls

A holiday-shortened week opened with a down day in the stock market that couldn’t continue the upside moves that closed out last week.

Earnings season is in full swing, and big banks kicked off the week with a mixed bag of results. Stock market participants didn’t like what was happening and the Dow alone fell almost 400 points.

Traders are encouraged not to get complacent in these conditions and stay on top of economic news events and stock market price swings.

Mixed bag of bank reports spooks traders

Traders were likely spooked when Goldman Sachs reported its worst fourth-quarter earnings results in 10 years while Morgan Stanley reported positive earnings. The banks’ stock moved up and down, accordingly.

Building on the rally last week may prove a choppy proposition for traders this week.

“Last week, large bank stocks kicked off earnings season and each of the names that reported rallied after posting results that were ahead of reduced expectations as high interest rates last quarter improved profits,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading.

“Paying attention to investors’ responses to corporate earnings is a great way to gauge sentiment as buying in stocks of companies who come in above estimates that have been lowered points to positive sentiment,” Mary ellen said.

Switch focus to new sectors in shaky stock market

If banks appear shaky for traders, the consumer discretionary sector may produce some opportunities.

“Shoe manufacturers and retailers have been a bright spot in this sector, as the trend toward comfortable shoes amid a work from home environment has carried into the post pandemic era,” Mary Ellen said.

She is also looking at pandemic-induced changes in consumer habits.

“Athletic footwear has also outperformed as the closure of gyms during covid related lockdowns pushed individuals outdoors,” said Mary Ellen. “This is another trend that has remained.”

One area that has weakened is healthcare.

“The Healthcare sector was down slightly amid continued weakness among large cap pharmaceutical stocks that have stalled over the past several weeks,” Mary Ellen said.

Traders must continue monitoring the overall picture week-to-week due to a variety of factors that affect stock market price action.

“Last week, the markets ended on a strong note with the S&P 500 clearing its 200-day moving average amid earnings reports that were rewarded despite weak guidance going forward,” said Mary Ellen. “Investors also focused on the possibility of a less aggressive Federal Reserve policy as signs of slowing inflation trickled in.”

“While inflation data and the Federal Reserve’s response will remain central to the market’s price action, corporate earnings reports have proven to be equally powerful during this bear market,” Mary Ellen said.

She will be watching more earnings reports expected this week, including Netflix, Inc. (NFLX), Costco Wholesale Corp. (COST), and Procter & Gamble Co. (PG), and next week the big tech rollouts of Microsoft Corp. (MSFT), Tesla, Inc. (TSLA), and Apple, Inc. (AAPL).

Traders must control fear, complacency

Fear and complacency are two emotions to watch as the 2023 stock market conditions unfold.

Key fear gauges – VVIX and VIX – must be watched as they are now out of sync, according to Sam Shames, Vice President of Options at Simpler Trading.

The Chicago Board Of Exchange (CBOE) Volatility Index (VIX) anticipates market volatility – or fear – over the next 30 days. The VVIX is essentially the “fear index” of the fear index that measures volatility of price in the VIX.

“Mechanically, there are a lot of shorts in the market, and they can be sequentially stopped up on a march higher, so the fuel is there for higher even if people are skeptical of the rally, the number of short positions is enough to power it higher,” said Sam.

Complacency, which can cause big problems for traders in an erratic stock market, is a worry for traders.

When optimism creates the environment of expecting the market to trend upward (complacency), traders tend to look for opportunities to buy inexpensive calls and capitalize on the trend.

History related to the market’s reaction to complacency hasn’t been kind to traders. The reaction is similar to a rich parent cutting off a child’s trust fund, and it’s common in bear markets.

Complacency among traders has been an issue for those working through the transition from a steady bull market to a pandemic-induced bear market. This period has been rough for traders who for years grew complacent that the market would continue rising no matter what happens (even the pandemic didn’t totally crash the market).

‘If this, then that’ dynamic still at play in stock market

Sam continues to follow an “if this, then that” dynamic in the stock market environment.

“If the SPY holds $390, then we look for a battle higher at $400,” Sam explained. “If the SPY holds $400, then we look for a battle higher at $410. If the SPY loses $380 on weekly close, then we look for a max short situation.”

In the market today, the Dow gapped down to 33,910.85 points to fall 1.14% (dropping 391.76 points on the day). The S&P 500 slipped by .20% to 3,990.97 points. The Nasdaq chalked up the lone positive day, rising slightly to 11,095.11 points for a .14% gain.

Sam is also watching various economic news events that may impact market direction.

These include (PPI) and speaking engagements this week among Federal Open Market Committee members.