At the start of the year, I laid out my expectations for 2019.
I mentioned that this would be an “extremely profitable” year to invest.
All signs pointed to a stock market rally after the 6% drop last year.
It was an easy call to make.
The stock market has only experienced back-to-back down years four times since the Great Depression.
So, when the market jumped more than 10% in the first two months, it wasn’t much of a surprise.
The question now is: What to expect for the remainder of the year?
Beware, this great start won’t carry on at an exponential pace.
There are going to be ups and downs.
Another shift is making the next major move for the market. It’s as easy to see as the rally was that started 2019.
Broad market indexes have been trading sideways for the last two weeks. This consolidation period will lead to a sharp move.
The stock market’s reaction to earnings is telling us that stocks are set to head lower.
Let me explain…
Earnings Signal a Major Pullback
Stocks are set to drop in the coming months.
This decline won’t be about politics, trade wars or the Federal Reserve.
It’s about earnings.
They are a key driver of stock market growth as investors like seeing corporations grow. And they are signaling a major pullback.
The earnings announcements we’ve seen this year represent the fourth quarter of 2018. And so far, investors don’t seem to care much about the weak quarter.
Instead, overdone sentiment and weakness in the stock market drove stocks to rally. The sharp drop on Christmas Eve marked the bottom, and stocks didn’t look back.
Stocks With Weak Earnings Climb
The bounce off the bottom allowed stocks with weak earnings results to see the best price movement in nine years.
Investors are not punishing weak stocks like they usually do.
According to FactSet, companies in the S&P 500 Index that reported negative earnings surprises saw an average price decline of 0.4%. The decline was from two days before the company reported earnings to two days after.
Over the past five years, the decrease was 2.6%.
As we head into earnings results for the first quarter, beginning in April for most companies, investors are going to take profits and increase volatility within stocks.
That will set up a sell-off through March and early April.
Hold on to Your Investments During the Bumpy Ride
Now is not the time to sell.
My outlook for the year remains positive. Stocks will end higher by next January.
But the road along the way will be bumpy.
Timing these pullbacks precisely is difficult. I follow the markets and constantly watch indicators for when the pullback is setting in. It’s still challenging to have perfect timing.
But during this turbulent period, great stocks will remain great. They may sell off, but they’ll bounce right back.
The market, even with a pullback, is creating a renewed uptrend that will help send stocks to all-time highs, possibly as soon as this year.
That’s a rally you simply do not want to miss!
In the meantime, you want to follow solid strategies throughout this pullback.
Solid strategies will profit regardless of market conditions, and that’s exactly what my Quick Hit Profits strategy is about.
Using put options during the December stock market pullback led to a 200% gain on Apple and a 100% gain on NetApp. And when the rally followed, we used call options and added 50%, 60% and 100% gains.
So even though earnings call for a volatile market over the next few months, it’s important to remain invested.
I’m sticking to my trading strategies, and you should, too. You’ll benefit as the uptrend remains intact.
Chad Shoop, CMT
Editor, Automatic Profits Alert