Volatility has been the market watchword over the last week, whether measured by the Chicago Board Options Exchange Volatility Index, commonly referred to as the VIX, or by the swings in the major market indices.
While the S&P 500 is essentially flat as I write this, it has gyrated more than 50 points up and down over the last five trading days. On a points basis, that doesn’t sound like much, but when we view that move in context against where the S&P 500 is trading, we see the index has swung more than 3.6 percent.
For the month, the S&P 500 has fallen more than 2 percent. This has curbed returns for the S&P 500 from 12 percent at the end of March to 10 percent now. As earnings reports accelerate even further next week, odds are that market volatility will shoot up as well. The drip of earnings reports started last week and became a steady stream this week as more than 400 companies shared their March quarterly results and revisited their 2012 forecasts.
The pace will accelerate next week as more than 1,300 companies are expected to share results and prognostications. On Thursday alone more than 500 companies will go through this quarterly ritual.
Based on the companies that have thus far reported their March quarter results, I would generally characterize them as mixed.
No doubt a number of companies delivered solid results for the March quarter, including banks and financial institutions such as Citigroup, Morgan Stanley and Goldman Sachs. All have reported better-than-expected results, as have technology companies such as eBay, IBM and VMware.
But for every company that reports a solid quarter and bubbly forecast, there are ones that have reported either lackluster March quarter results or shuttered previous 2012 forecasts. Former mobile phone giant Nokia reduced its outlook after conceding that smartphone competition is far fiercer than it had expected. Yum Brands’ first-quarter restaurant sales in China slightly missed analysts’ lofty expectations for the market that accounts for more than 40 percent of the company’s profits. KB Home posted a lower-than-expected first quarter loss, but orders still fell 8 percent to 1,197 homes in the quarter. Orders are a key indicator for builders that do not book revenue until closing on a house.
In particular, that decline in home-building orders by KB Home kicked off a reversal in the housing market, which had been improving during the first few months of 2012. That improvement came under scrutiny as the latest economic indicator readings for the housing market — housing starts, existing-home sales, and the National Association of Home Builders’ Housing Market Index — all fell month over month.
Pair that with monthly declines in regional manufacturing indices — the Empire State Manufacturing Index as well as the Philadelphia Federal Index — and concerns over the velocity of the domestic recovery are once again on the rise. Oh, and let’s not forget the recent rising trend in weekly jobless claims.
What’s different this week in a good way is the continued fall-off in natural gas prices, which are near a 10-year low, and a dip in gas prices at the pump. Over the past week, gas prices have fallen a few pennies per gallon, and this modest move will likely reignite claims that gas prices have topped out. While that may be the case, we have to remember that higher gas prices year-over-year at sustained levels cause not only pain at the pump but put pressure on discretionary spending.
While most financial pundits will continue to focus on earnings headlines, investors need to dig deeper into company results to understand what’s affecting a company’s performance in both good and not-so-good ways. By deciphering these inflection points, we’ll be better prepared to take advantage of overall market volatility as the quarterly earnings season continues.
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @ChrisVersace. At the time of publication, Mr. Versace had no positions in companies mentioned.
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