U.S. equity markets are trading lower on Thursday. Although the newswires haven’t centered on the reason for today’s weakness, I suspect they’ll have some reason by the end of the day.
From the headlines throughout the week, at a glance, one would think the stock markets have been booming this week. However, looking at today’s early price action, you’ll see the NASDAQ Composite trading lower for the week after striking a new all-time high just a few days ago. The benchmark S&P 500 Index and the blue-chip Dow Jones Industrial Average are both in a position to turn lower for the week.
It’s only Thursday, but a lower close for the week in all three major indexes will speak volumes and may even be an indication that we’ve hit our summer highs. A top this early in the second quarter earnings season will definitely come as a surprise since investors have high expectations for this earnings season. According to analysts polled by FactSet, the crowd is expecting to see 20 percent year-over-year profit growth for the second quarter.
However, you have to remember that earnings and revenue reports represent the past and stock prices are supposed to be discounting future events. So while it’s nice to see stocks rallying, across the board weakness in the major indexes should be viewed as a red flag. And with recent data showing money flowing into Index ETFs, investors should be concerned about this week’s price action.
One has to question how much diversification is out there, and one has to worry about how much overlap exists in all these ETFs. Some say that if it wasn’t for the FANG stocks – Facebook, Amazon, Netflix and Google-parent Alphabet, the NASDAQ wouldn’t be performing near as well as it has this year.
We saw earlier this week how fragile the indexes are when Netflix earnings report showed a drop in subscriptions on the same day that Amazon had a glitch in its computer systems in one of its busiest days of the week. Although the sell-off in response to these two events was quick and decisive, it did open the door to the thought of what could happen if all four FANG stocks decided to turn lower at the same time.
We should learn more about how strong or how fragile the stock market is when Amazon releases its earnings and revenue results next week. In the meantime, investors should pay attention to Friday’s close because a lower close may tell us that it may be time to start getting defensive about the stock market.
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While it’s always nice to think about the upside potential of the stock market, it’s equally important to think about the downside risk. Is it possible that investors have been so mesmerized by the quest for $1 trillion in market valuation by Amazon, Apple or Microsoft that investors have forgotten about downside exposure? We could soon find out.
Getting back to the reason for today’s weakness, it could be a combination of events including disappointing earnings, worries over prolonged trade disputes or even Fed Chair Powell’s hawkish talk about rising interest rates. Whatever the reason, keep an eye on Friday’s close because how the market finishes this week may send out an important signal about the status of the market at current price levels.