Volatility Begins To Contract!

Last few days, the overall stock market was driven by pure emotional volatility.
The primary catalyst steps from tension in Washington that originated from the release of the Nunes memo.

Nothing impacts volatility in the markets more than Global and U.S. tension…more so than earnings or any type of corporate news.

Without any resolution in site and Democrats trying to disprove the veracity of the memo, the markets may end up seeing more volatility ahead.

The second major catalyst causing sharp increase in volatility is accelerated pace of the economy, which typically causes FED to raise rates faster.

Higher rates are bad for stocks and because the expectations shifted from 3 rate hikes this year to 4, the sentiment quickly shifted.

Keep in mind, behind global and U.S. political news, the bond market is the second biggest catalyst for stock prices and sudden growth in economy can cause moderate weakness in the near term.

Earnings have been completely overshadowed in the past few sessions and have causes very little influence on the overall market structure, especially in light of the bond market and data out of Washington.

At this time, we have Q4 results from 294 S&P 500 members that combined account for 75.1% of the index’s total market capitalization.

Total earnings for these 294 index members are up +15.3% from the same period last year on +9.4% higher revenues, with 79.6% beating EPS estimates and 76.9% beating revenue estimates.

For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +13.7% from the same period last year on +8% higher revenues.

Q4 earnings growth for the Energy sector is the highest of all sectors, with total earnings for the sector expected to be up +150.1% from the same period last year on +23.1% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up +11.5%.

Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up +22.1% on +10.5% higher revenues. Finance sector earnings are expected to be up +5.6% on +2.8% year-over-year growth in revenues.
The Q4 earnings and revenue growth pace for these 294 companies is notably tracking above what we had seen from the same group of companies in other recent periods.
Technically, stocks are trading at the 50 day moving average, which tells me that the level of tension between the bulls and bears is fairly strong.

Typically, large funds key off the 50 day line, but with overall volatility rising over 4X the daily trading range, most fund activity is muted, at least till markets regain their structure, which will take another few sessions at best.

The bond market is temporarily oversold and I’m expecting price to bounce back over the near term.

The 10 day RSI is below 30 level, which tells us that price should bounce back or congest near the current level, before bouncing back down and reverting back to the long term downtrend.

Finally, short term volatility level began showing decline, after the single biggest one day spike in history.

Volatility usually precedes price and Wednesday’s trading range confirmed that the overall market is turning the page and possibly starting to contract or congest…that’s the first major step to reduction in volatility and beginning of directional movement once again.

Expect volatility to decline till VIX level drops below the 20 level, which is the major threshold level for increased level of fear in the market.

Ultimately, we can expect VIX to drop to the 50 day moving average while the overall stock market begins trending once again.

Roger Scott
Senior Publisher