Did the Poor Reactions to Key Earnings Push Market Into Bear Territory?
Big tech earnings produced some of the worst action of the year. The question now is whether the selling sets up a year-end rally.
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Negative reactions to key earnings reports this week produced some of the worst action of the year. Alphabet (GOOGL), Amazon (AMZN) and Intel (INTC) were the primary villains, but they had a lot of help from other names, mostly in the technology sector.
The selling gained traction on Thursday after Alphabet’s report, but the good news was that the money rotated into other areas of the market. The Dow Jones Industrial Average and the iShares Russell 2000 ETF (IWM) finished with gains, and breadth was positive.
After the Amazon and Intel reports on Thursday night, the selling intensified, and this time it was much broader, with only about 22% of stocks in positive territory on Friday. As I discussed on Friday morning, there usually comes a point when it gets ugly enough that buyers prefer to stand aside completely rather than rotate.
The selling was broad, but it was much worse in tech than elsewhere. The Invesco QQQ Trust (QQQ) lost 3.5%, and the VanEck Semiconductor ETF (SMH) was down 7%. The Invesco S&P 500 Equal Weight ETF (RSP) dropped only 0.8%, and the SPDR S&P Biotech ETF (XBI) was down 1.2%. Relative strength in the form of smaller losses is cold comfort, but it shows that rotation is still taking place.
The indexes haven’t fallen the 20% that defines a bear market, but with the leaders now breaking down, it looks and feels like one.
Oil and the Election
A couple of other issues were at work as well. Oil continues to hover near its highs as talk of possible military action against Iran builds. There is also plenty of chatter about what Democratic control of the U.S. Senate would mean for the stock market after Tuesday’s election. I suspect that as long as there is gridlock and neither party can advance its agenda, the market will handle the outcome just fine.
Looking Ahead
Another positive is that we start November next week, which has strong seasonal tendencies. The period after a midterm election has also historically been one of the strongest stretches of the four-year presidential cycle. Combined with the election being behind us, that could make for a turning point.
Earnings reports continue next week with Apple (AAPL) and many smaller companies. I’m still optimistic about buying opportunities, but I’m staying patient and not rushing to deploy precious capital. I’ll be watching carefully for a year-end rally. Selling like we saw this week is probably the best possible setup for one.
Have a great weekend, and don’t forget to turn back your clock. I’ll see you on Monday.
At the time of publication, DePorre was long AMZN.
