Volatility Abounds! 5 Observations

1. The market is extremely volatile right now intra-day and day to day, but the volatility seems confined to a relatively narrow trading range. We saw this phenomena in 2015 where we witnessed a highly volatile year that ended with stocks sitting almost exactly where they started. In other words, this doesn’t look like the beginning of a major correction/crash. This looks like a flat market that is making going sideways look far more exciting than we’d like.
2. The S&P 500 has found resistance around 2188. That level has now been tested twice and held, forming a classic ‘double dip’ or ‘w’ shaped correction for all you technical traders. Typically the market would move up from this point.
3. The market is back to headline following. We praised the market in 2017 for ignoring news headlines, tweets, and other noise and focusing on fundamentals. In 2018, the market is back to the bad habit of hanging on every news headline. Someone says ‘tariffs,’ the market drops 2%. Someone else says maybe not, the market jumps back up.
4. It’s nearly earnings season. The good news is earnings are likely to be good. The slightly bad news is expectations for this earnings season are enormous. Companies can ‘miss’ this quarter and still have excellent earnings. If the market is priced to perfection (which is very hard to tell with all of the volatility), we could see some pullback even based on solid earnings. Of course, earnings can always boost stocks to the positive as well.  Either way, earnings will perhaps push the market out of the range bound volatility loop.
5. We stated in January that we felt a potential trade war was the biggest threat to the bull market. While that now seems more fact than prediction, we remain skeptical that a full scale trade war (which is in no one’s best interest) will actually occur. It would be helpful to find closure on this issue, however, as the headlines are certainly holding the market back. Hopefully a new deal on NAFTA is imminent and that will end tariff talk that impacts our nearest neighbors. China made a major concession April 10 stating it will end tariffs on imported automobiles, which is a huge step in the right direction. If the market can put talk of trade wars behind it, the fundamentals appear to be in place for the market to continue moving upward.

One of our core investment philosophies is that the markets eventually return to fundamentals. Sometimes it takes a frustratingly long time, but ultimately prices are set as a multiple of earnings, which rewards companies that are doing well and punishes those that are doing poorly. What happens in between is noisy and irrational, and we certainly seem to be in one of those noisy irrational moments. We will know much more after we see the next round of earnings, but economic fundamentals suggest the economy is still in a good place and the longer term prospects for the stock market look good.

The information provided herein is taken from publicly available sources and not verified. The opinions expressed herein are Rev Capital, LLC's, opinions and should not be relied upon as investment advice. If you are not a client, please consult a financial professional before making any investment decisions.