Busy Week Ahead With Earnings From Apple, Microsoft, Tesla

On Sunday evening, the S&P 500 futures had turned positive and looked to rally. However, the futures turned once again overnight and were trading 0.85% lower before the open. The benchmark index may be heading towards its September 2021 lows near 4300 level for support. The CBOE Volatility Index (VIX) has spiked higher and is near 31, suggesting that investors’ nervousness continues to rise.

This could be a big week for stocks with heavy hitters like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Tesla (NASDAQ:TSLA) reporting. Additionally, the Federal Reserve will meet this week and hopefully lay out a plan for hiking interest rates in the near future; this could give investors some confidence in their plan to curb inflation. While these news events will be great for those of us who write market commentary, they could spell headaches for investors.

Stocks like Apple and Tesla often provide an insight into investor psychology, so this week could be a “vote of confidence” from investors on market strength. Apple has been a mainstay for investors and has often demonstrated strength compared with other technology stocks. Even with the recent pullback, Apple is down about 11% compared with the Nasdaq Composite, which is down more than 13%. Tesla has been a “buy the dip” kind of stock and investors have been willing to go to that well several times. However, with the Fed raising rates, investors may not be so willing to drink from these wells.

After Thursday’s close, Netflix (NASDAQ:NFLX) announced better-than-expected earnings, but projected major slowdowns in subscription growth. The stock immediately fell in after-hours trading, which translated into Friday. NFLX fell more than $100 per share and closed 21.79% lower on the day. The announcement was felt throughout the Nasdaq Composite, which fell 2.72% and broke another level of support. The index has fallen further into correction territory and is now 13% off its all-time high. The Nasdaq’s next major level of support is about 13,000. If the index falls that far, it would near bear market territory because it would be down 20% from all-time highs.

Of course, the Nasdaq wasn’t the only index to fall on the news. The S&P 500 dropped 0.75% with materials, consumer discretionary and financials leading the way to the downside. Ecolab (NYSE:ECL) was the worst-performing stock in the materials sector of the S&P 500, falling 8.48%. ECL is a world leader in water, hygiene and disincentive products. It announced a 12% price increase globally. The price increase could hurt the company’s sales, which is probably driving the stock lower.

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As expected on a down day, defensive sectors, including consumer staples, real estate and utilities were the top performers and the only sectors to close in the green. Bonds also moved higher as the 10-year Treasury yield dropped back to support around the 1.75% level.

The VIX was flirting with 30 throughout the day, which reflects the rising fear among investors. However, in an odd twist, over the last year, the 30 level has often signalled the end of a sell-off. Some sell-offs or corrections correlated with a VIX as high as 37. So, this development may be something to keep an eye on. At this point, we may start seeing investors trying to pick market bottoms next week. They’ll be looking to buy up potential bargains. For example, on Friday, investors were already buying up stocks like Peloton (NASDAQ:PTON) and McDonald’s (NYSE:MCD), which are a couple of stocks that have been pummelled by investors recently. This kind of buying could signal that the pendulum has swung too far in one direction.

When markets turn bearish, there’s often a “flight to quality” as investors sell riskier small-cap stocks in favor of large-cap blue-chip stocks. Investors are selling small-cap stocks, with the Russell 2000 falling another 1.20% on Friday and adding to its four-day losing streak. While dropping 7.5% this week isn’t nothing to sneeze at, it’s not the panic selling expected during a bear market when investors are shunning risk.

In fact, the S&P 600 Small Cap index tracks 600 “higher-quality” small-cap stocks, and it’s actually trading in-line with the S&P 500. Of course, both indices have recently moved lower, but quality can be in small-cap as well as large-cap stocks. Like the S&P 500, the S&P 600 has seen strength in the energy and financial sectors but weakness in information technology and communication.

So, while the lack of breadth signalled from the falling Russell 2000 is still concerning, it’s a stock pickers’ market. In my January Outlook article, I warned that this year could be the year of the active fund manager because investors have to search for quality. Unfortunately, quality flights cost a little extra—in time for searching and analysis.

Selling Into The Close: The last hour of trading last week was brutal on stocks, which made many glad it was a shortened holiday week. However, traders often see last-hour sell-offs as bad sign for stocks for the following trading day. Traders often pick up the next day, where other traders left off on the previous day. However, there’s no guarantee that selling into the close on one day means stocks will sell off the next day. While it may mean something to a day trader, for many investors, selling into the close goes unnoticed.