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The stock market could be in for a period of rocky trading to lower levels, as investors work through earnings season and wait for developments on trade, analysts said.
Stocks were slammed Monday in a selloff that accelerated on negative earnings news from global cyclical Caterpillar and chipmaker Nvidia. Both companies pointed to weakness in China, feeding fears of a global slowdown.
"We're not making big bets for or against stocks and bonds. We're trying to see if this is a garden variety slowdown or if it's the beginning of something worse. I don't think any of us knows the answer to that now," said Ed Keon, portfolio manager and chief investment strategist at QMA.
Some technical strategists who say the could fall further, see a drop of 5 percent as a possibility with the S&P dipping to a support level of around 2,500. But some analysts, like Keon, say more than declining, it would not be surprising if the market becomes locked in a sideways move for awhile.
For the month of January, the S&P 500 was up 5.2 percent as of Monday and up 12.2 percent since the Dec. 24 closing low. The S&P 500 was trading just under 2,640 Monday afternoon, a decline of 1 percent. Stocks were selling off Monday on the eve of a Fed meeting where the Fed is not expected to take any action on interest rates but is expected to sound very wiling to pause its rate hiking.
"Tactically, February does sport a mixed performance reputation and may be a catalyst for a pause or consolidation after a +15% rally. There's been some modest loss of momentum over recent days, but we'd look to the 2500/2550 area to offer support and contain weakness moving forward," Strategas analysts wrote in a note. On average, the S&P 500 has been flat in February, going back to 1950, according to Strategas data.
Ari Wald, technical strategist at Oppenheimer, said he believes the market is in a consolidating phase, after its big run higher from the December low. He said stocks could test lower levels, but he is not looking for a return to the December low of 2,346.
"A higher low makes more sense to us," said Wald, noting the S&P could retest back to 2,500.
"Just in terms of near term support level, I don't think today's drop is necessarily meaningful in terms of falling below any important support levels. The level I'm watching on the downside is 2,600."
That level was the Oct. 29 low, and another important level in December. "When we really started to drop again, the market really started to cascade on that initial breach of 2,600," Wald said.
U.S.-China trade talks, which resume this week at a high level are seen as a possible catalyst for the market.
"This week and next week, we have the Fed, trade talks and earnings. For the very near term, trade is probably going to be the biggest driving force for what the market does," said Dan Suzuki, portfolio manager at Richard Bernstein Advisors. Suzuki said he optimistic for a deal. "If you look at the way Trump negotiates, it's going to go to the 11th hour, and it's going to feel like there' won't be a deal," he said.
The wave of earnings news could also help decide the direction. About a quarter of the S&P 500 reports this week.
"The earnings news has been mixed to some degree. We had some good reports last week, a couple big cyclical companies...[Stocks] got off to a great start this year, as we did last year and it feels like maybe we got a little ahead of ourselves," said Keon. "...We're heading for a slowdown and the market is trying to figure out if it's a slowdown or recession. We still think it's a slowdown. Once you start slowing down, it's hard to know where you're going to stop."
Keon expects earnings to be flat this year, and estimates have been falling. As the fourth quarter earnings season progresses, analysts have been lowering earnings estimates for upcoming quarters. According to Refinitiv, earnings growth in the first quarter is expected to be just 1.9 percent, sharply lower than the 14 percent profit growth of the fourth quarter, which is currently being reported.
Suzuki said he's keeping an eye on earnings growth. "If it looks like that number is low single digits, and it is going to start to go negative, that would be a much bigger red flag," he said.
But Suzuki says he's still expecting the market to head higher this year.
"We're still pretty constructive for the market. We think the general trajectory for the market is higher. That being said I think it's going to be choppy. We had this nice run, and it's very possible the market starts to have doubts again," he said.
Todd Sohn, a technical analyst at Strategas, said the mega cap tech reports this week could be very important, with Apple Tuesday, Microsoft Wednesday, and Amazon reporting Thursday. Apple pre-announced a big hit to its revenue from weak Chinese iPhone sales.
"You want to see if Microsoft stays on its trajectory," said Sohn. "Apple can not get anything going. You have to keep an eye on Amazon. That has also rallied back to its 200-day moving average, and that could be an area of congestion. It has struggled to break through it."
Sohn said on Jan. 18, Amazon briefly crossed above the 200-day moving average, a momentum indicator, but fell back below it. That level is now 1,715. "I also want to watch the big weights, Adobe and Salesforce. These are the names that tried to rally back, " he said.
Sohn said the speed of the market's rebound from the December low is reason enough for a pullback. ""You could make the case for 2,600. It was a big level on the downside," Sohn said.