Any sports fan who's listened to post-game media interviews with coaches or players over the years is likely familiar with a certain phrase: “It is what it is.”
On the surface, the expression–indicating the immutable nature of an object or circumstance–might seem the verbal equivalent of a punt. But there is deeper meaning that applies in sports and in other things in life, including investing.
The market does what the market does, and you, as an individual, can control only so much. So deal with it.
"Investors would be wise to remember that as another earnings season winds down and summer approaches," says JJ Kinahan, Chief Market Strategist, TD Ameritrade.
By the end of this week, about 90% of S&P 500 (SPX) companies will have reported earnings for the most recent quarter, according to research firm CFRA. The U.S. market appears to be heading into relatively lighter “news” period–that is, news we can see coming, like elections and major economic reports.
What could move the markets in the weeks ahead? What event might goose this stock higher or send that stock into a tailspin?
If you find yourself asking such questions, you might be getting a little ahead of yourself.
“The important lesson for retail investors is to trade what you see, not what you want to see,” says Kinahan. At the end of the day, whatever number you’re watching, whether it’s the S&P 500 or an individual stock price, “is what it is.”
Fear Factor Flagging
Volatility has been particularly subdued lately. The CBOE Volatility Index (VIX) closed at its lowest level in a decade. Some market pundits are cautioning about “complacency” among investors and traders.
“The market is not seeing much risk in next 30 days,” Kinahan says. But that can change quickly, he added, with tax and health care legislation among the potential risk factors for the markets over the next few months.
The current earnings season delivered generally encouraging results for investors, with 10 of 11 U.S. sectors tracked by CFRA posting year-over-year profit growth. Last week, the Nasdaq (COMP) and SPX closed at record highs.
Still, some market professionals expressed skepticism.
Even with the record highs, “there was a feeling that something was missing in that effort, which mitigated the feeling of enthusiasm,” Patrick O'Hare, Chief Market Analyst at Briefing.com, wrote in a report. Two possible red flags: the absence of both high volume trading and the lack of a Treasury price sell-off, he added.
“In other words, it wasn't the most convincing break to new record closing highs,” O’Hare says. “At the moment, market participants are continuing to hold their applause.”
What's the Next Catalyst?
Sam Stovall, Chief Investment Strategist at CFRA, says that with earnings season near completion and France’s elections over, investors are searching for a “catalyst” to propel the market higher.
“The market has gone a long time without a meaningful decline, and we are in the cautious ‘sell in May’ period, so investors should not chase stocks,” Stovall says. With price-to-earnings ratios high, the market is vulnerable to an “exogenous shock.”
Still, Stovall added that “I don't think investors should turn tail and run.” Indeed, few appear eager to write the obituary for the bull market. Over the past 12 months, the S&P 500 had at least a dozen record closing highs, some followed by pullbacks of a few days or weeks, only to march even higher.
Kinahan said investors should learn to discern and capitalize on trends between heavy news cycles.
Moreover, trying to call tops and pick bottoms–market timing–is a dangerous game for retail investors, Kinahan noted, citing the old trader adage that the market can stay “irrational” longer than you can stay solvent.
“So many times I see retail try to pick the bottom and sell the top,” Kinahan says. “If you are able buy on downtick and sell on uptick, consider it lucky circumstance. Most traders I know don’t count on that.”
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