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Can Street Overcome Early Pressure and Beat the Friday Blues?

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April 15, 2016

(Friday Market Open) Financial sector earnings remain top of mind for the Street on Friday with Citigroup (C) beating top- and bottom-line expectations, but can the market extend its rally?

Equities have moved higher this week thanks to the big banks not disappointing with their earnings. But one thing we’ve seen recently is that when the market has had a good week, it comes under pressure on Friday. That seems to be the case early.

The financial sector has posted five days of gains in a row for the first time since July, and is up more than 4% this week as the big banks report. It’s been a nice week for banks, with Citigroup the latest to beat consensus, even though profits fell 27% year over year. The disappointing factor in Citigroup’s earnings was on the trading side, as many expected after the other banks reported similar weakness. But it was good to see Citigroup’s CEO say in the earnings press release that the company is becoming a “simpler and safer institution.” 

This weekend’s planned crude producer meeting continues to influence the stock market, with bullish investors hoping major producers can agree on some sort of a production freeze that would perhaps put a floor under the oil market. But news ahead of the meeting seemed to point toward a less certain outcome. There was a report that Iran’s oil minister wouldn’t attend. And Russia’s finance minister told CNBC he doesn’t expect the meeting to have an effect on prices. With these sentiments floating around early Friday and oil near its highs for the year, crude prices fell. It will be worth watching the oil futures market when it opens late Sunday to get a sense of how it reacts to the meeting results.

On the overseas front, there was some good news out of China, which reported 6.7% growth in Q1, in line with expectations.

Keep in mind that Friday is an options expiration day, and that can sometimes cause volatility.

S&P 500

FIGURE 1: RANGE-BOUND DAY FOR SPX.

The S&P 500 (SPX), plotted here through Thursday on the TD Ameritrade thinkorswim® platform, traded in a tight range after Wednesday's rally to 2016 highs. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Fear of Heights? A day after Wednesday’s strong upward move, the S&P 500 Index (SPX) barely eked out a gain Thursday, closing just 0.02% higher. There may have been some reluctance to bid prices up much further at this point, considering the new highs made on Wednesday, lots of earnings reports to come, and the fact that the market isn’t too far from last spring’s peaks. There’s relief that the big banks’ earnings reports weren’t any worse than expected, and in some cases, a little better.

Volatility - Where Art Thou? As the market approaches the heart of earnings season, it’s interesting to see that the CBOE Volatility Index (VIX), the most widely-watched gauge of fear, has fallen in recent days to relatively low levels. Just a couple weeks back, VIX was on the rise, climbing from under 14 at the start of the month to above 16 late last week. Now it’s fallen back under 14. Compare that to Q4 earnings season in January, when VIX soared from below 22 to nearly 29 in a very short period. Granted, there were some pretty dramatic fundamentals affecting the market then, including oil’s plunge to decade lows and concerns about China’s economy. Now the market has rallied back toward the highs of last summer, and when markets go up, volatility tends to go down. But keep an eye on the oil meeting this weekend, because volatility likely could hang in there a bit due to the uncertainty around crude producers’ intentions.

Delta Kicks off Airline Earnings With A Beat: Though the big banks dominated this week’s earnings headlines, next week will see some major air carriers report, with Southwest (LUV), United Continental Holdings (UAL), Alaska Airlines Group (ALK) and American Airlines Group (AAL) all scheduled. Delta Air Lines (DAL) got things going with its earnings Thursday, and results were a bit of a mixed bag. Earnings beat estimates, but revenue was a little bit under consensus, hurt by weak foreign currencies and the terrorist attack last month in Brussels. Shares of Delta rallied early, helped by the earnings beat, but finished off their highs, perhaps hurt in part by the company’s forecast for a 2.4% to 4.5% drop in passenger unit revenue during Q2. It’s definitely worth keeping an eye on airlines, because strength there typically reflects strength in the consumer.

Good Trading,
JJ
@TDAJJKinahan

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