The S&P 500 lost 4% this past week, and that move is primarily attributable to growing concerns about lawmakers in Washington DC stepping up to come to an agreement on the U.S. debt ceiling; and the possible downgrade of U.S. credit by one of the ratings agencies. That could happen even if a debt agreement is reached.
We saw this uncertainty play out in various markets throughout the week, and the most striking result was the 45% increase in the Volatility Index (VIX), which measures volatility expectations. The increase in the VIX illustrates a much greater degree of uncertainty about the market, and is measured from the higher costs of put options which can protect traders and investors from drops in stock prices.
The flow of money into safer assets has also resulted in a 1.6% gain in gold prices to new all time highs. Gold could be the ultimate shelter if things deteriorate around the world. Surprisingly, U.S.treasuries went up this week, lowering 10-year yields 2.80%. This is surprising because this is the debt that would be downgraded. It was seen as a safety zone as there apparently was little fear that treasuries will lose their standing as one of the safest securities in the world.
This is a Dr. Jekyll / Mr Hyde scenario where stocks go down because there is fear, but the treasuries that the fear is about go up.
There could be an extension of this past weeks move in equities, accompanied by more volatility on Monday. Further selling in the stock market could become the catalyst to a faster compromise. The Sunday morning news programs will no doubt have there slate full of one side blaming the other.
Looking more closely at Friday’s price action, the market closed on more negative headlines, with little concrete progress on the debt limit negotiations, and a weak Q2 GDP reading to add to the mixture, and it came on top of a negative revision to Q1.
Despite the negativity, the S&P managed to hold its 200 day moving average, which is a plus from a technical point of view. The bounce during the day likely involved some short-covering after the S&P 500 held its 200-day moving average for a while, and the possibility for a weekend deal before the market opens on Monday.
Earnings season progressed this week, (lets us not forget about earnings), and roughly 2/3 of the S&P 500 companies have now reported. Overall, the earnings results are surpassing consensus expectations, with about 2/3 of companies beating bottom-line earnings estimates, and a slightly higher proportion of companies beating the top-line sales expectations.
Companies are being taken out behind the woodshed if they disappoint. STEC (10.17, -6.53), for example, lost 39% after reporting a disappointing quarter and issuing guidance that was below expectations.
Our Coloradofavorites Chipotle (CMG), and Crocs Inc.,(CROX) are holding up well. The market is rewarding strong growth. CMG and CROX belongs on a watch list for when all this drama resides.
Folks are asking if they should ‘jump’ in the market now that stocks are lower. A prudent answer is to trade their plan. Trade what they know. Yes opportunity and danger often travel together, but opportunity and risk to reward decline along with volatility; and anytime you ask for a measure of luck to help your trade you are gambling to that degree. Trading is not a form of gambling. It is a measure of probability and traded according to strict guidelines and discipline. Odds must be in your favor not luck to qualify for ‘trading’.
A seasoned trader will always choose good controlled odds (they get to pick) on a set up in their trading plan that they are accustomed to and comfortable with. They do this same thing over and over. Why suddenly take a flyer on a whim?
Trade with a plan.