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Could this be a make-or-break week for the U.S. stock market? In conversations with hedge funds and other smart-money investors last week, that was a thought we mused and not because we are particularly bearish on stocks but because seeing and respecting all possible outcomes in financial markets is what a winning risk management mindset is made of.
This week a major avalanche of earnings reports will hit the news wires, which notably will include a starter group of tech-related stocks such as Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) as well as a pack of large-cap biotechnology stocks.
According to Factset, thus far 73% of S&P 500 companies have reported better-than-expected earnings, and by my math on a year-over-year comparison, earnings per share are up roughly 10%.
All in all, these are promising numbers, yet to see both sides and considering the heavy weight of large-cap tech stocks in the indices as well as their psychological impact on investors, following the earnings and outlook from these companies there is some risk that investors take profits in this space. This in turn could have a snowballing effect in the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) as well as the Nasdaq 100 as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).
Checking the Charts
For perspective, I crafted the above multiyear chart of the QQQ ETF, which shows that it is once again trading at and even marginally above the upper end of this range. From a reward-to-risk perspective, in the near to possibly intermediate term, this does not set up what I would refer to as a high-probability trade to buy the QQQ ETF and, for that matter, any of its major constituents, despite the fact that structurally speaking and for the longer term, I remain a bull on large-cap technology stocks such as Alphabet.
Coincidentally (or maybe not so much), the CBOE Volatility Index, or VIX, last Friday reached a 20-year low near 9.3, which while not a major warning sign in and of itself, does now offer active investors a near unprecedented opportunity to buy “cheap” portfolio insurance via things like put options in the SPY ETF, something that I will be looking to do very early on this week.