Chaikin: Don't Worry, We're In A Normal Market

As far as fundamental drivers in the equities market, there’s no data point that generates quite so as much buzz as quarterly earnings reports, specifically revenue and earnings per share (EPS). They may not tell the whole story, but these two numbers can set the tone for investors for weeks afterward.

If the Q1 earnings season has shown us one thing so far, it’s that a strong top line doesn’t seem to matter much at the moment.

The raw numbers of this season bear out the fear theory that has kept the major indexes range-bound through the spring. As Marc Chaikin pointed out in his weekly Market Insights note on Friday, 79 percent of S&P 500 companies who have reported January earnings so far have exceeded Wall Street’s EPS expectation, and while 74 percent have beat on revenues.

This has included stellar reports from market leaders like Amazon.com, Inc. AMZN, Boeing Co BA, Microsoft Corporation MSFT, and Intel Corporation INTC. But despite that, the S&P 500 only finished April up 0.5 percent, and the index was actually down 1.3 percent through the first third of the year.

That dichotomy has befuddled investors the past few weeks. How can the market be going down if earnings are good?

As Chaikin outlined in his note, lingering effects from the February flash correction, as well as inflationary signals from the Federal Reserve, have proven to be overhangs on the market. However, he also made very clear that as real as the volatility in the market is, it’s nothing more than the normal reaction of a market digesting a big downturn.

“The correction in the stock market that began in late-January after a parabolic rise of 7.5 percent in January, which capped a 13 month advance of 28 percent, is progressing like almost all corrections of more than 10 percent,” he said. “It’s important to know that corrections last 4 months on average with an average decline of 13.4 percent. We are 3 months into this sell-off and have dropped 13.5 percent on an intra-day basis...all very normal”

So what should traders be aware of in this very normal market? Generally, Chaikin advises traders not overreact to short-term shakeups. He points to the 2,705 and 2,610 levels in the S&P 500 as key resistance and support respectively. Even if it does break the 2,610 level, Chaikin still believes that would likely signal a bottom. His extended outlook has the SPX finishing 2018 at or near the 3,000 level, anticipating an uptick in trend in the middle and back half of the year.

In the near term, Chaikin pointed to energy, financial and healthcare as the sectors that are looking the most bullish on the Chaikin power gauge. Specifically, he highlighted AmerisourceBergen Corp. ABC, Automatic Data Processing ADP, CVS Health Corp CVS and Excelon Corporation EXC, which all report Before Wednesday’s open, and Cardinal Health Inc. CAH, which reports before Thursday’s session.