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What a Mix: Social Media, Fed, and China Stir Volatility

July 28, 2015
A jumble of volatility sources

U.S. traders awoke Monday to news of the deepest one-day Chinese stock market drop since 2007 as wild swings there follow concerns that officials are stepping back from market-stabilizing measures. China is only one trigger of stock market volatility abroad and closer to home. Take your pick from a handful of other topics, including uncertainty about social media earnings from Twitter (TWTR) and Facebook (FB) and jitters ahead of this week's Federal Reserve policy meeting.

Even rising temperatures for much of the U.S. this week could raise tensions.

Volatility has already been mounting. The S&P 500 (SPX) has gone up or down a full 1% in a single day 32 times this year through July 24. That compares to 38 times in the whole year each for 2013 and 2014, says Sam Stovall, chief U.S. equity strategist at S&P Capital IQ.

"If this trend continues, we could see 56 days in which the S&P 500 moves up or down 1%," says Stovall, a well-known market historian.

Expect the market to turn up the heat in August, if the calendar is any indicator. Since 1950, August has delivered nearly the strongest volatility of the year, second only to October, Stovall notes.

Here’s a look at a handful of this week’s potential high-volatility market movers as July wraps and August begins.

Chinese Fireworks

Just how big is Monday’s 8% Chinese stock market drop? That translates into a roughly 1400-point drop in the Dow Jones Industrial Average at current levels, says Stovall. While the massive price drop does create a lot of uncertainty for global investors in the short term, Stovall downplays the potential lasting spillover impact for U.S. markets.

"The Chinese volatility is not likely to create cracks in our economic foundation. We don't believe the declines in the Chinese stock market will undermine the Chinese economy. We still see growth in China at 6.5% this year and next," Stovall says. "Capital IQ encourages investors not to sweat the volatility.”

Twitter and Facebook Up Next

The barrage of Q2 earnings releases continues this week, with social media giants Twitter (TWTR) reporting on Tuesday and Facebook (FB) on Wednesday.

"These are widely held stocks and it will be interesting to see what will be the magic sauce for making money off social media. Facebook has one of the most amazing databases in the world, now what can they do with it?” says JJ Kinahan, chief strategist for TD Ameritrade. “If these companies miss or provide weaker guidance, it could inject volatility into the stock market.”

Overall, Q2 earnings are coming in better than expected. Of companies that have reported through July 22, 92% of S&P 500 health care stocks beat estimates; 69% of financials topped S&P Capital IQ expectations; consumer staples were at 67%; and information technology at 64%. The highest percentage of earnings misses came for materials at 38% and energy and telecom at 50%.

What’s more, better-than-expected results could come at the expense of Q3, Q4, and full-year earnings estimates, warns Stovall.

Volatility Can Spell Opportunity for Active Traders

On a sector-by-sector basis, TD Ameritrade clients can visually track a heat map of the 10 S&P 500 sectors.

"You can see what sectors look weak to you and what sectors look strong to help you determine individual stock choices along with sector plays," Kinahan says (see figure 1).

"When you see higher volatility, consider keeping your position size smaller. It gives you a chance to be nimble. Stay small so you can react," he adds. 

Compare sectors with TD Ameritrade's Heat Map

FIGURE 1: NOT SO HOT, ACTUALLY? To pull up the S&P 500 heat map, launch the thinkorswim® platform and navigate to the MarketWatch tab. Choose the Visualize sub-tab. Next, expand the Indices selection and click on S&P 500 to view the index by sectors. Snapshot shown here taken July 27. Chart source: TD Ameritrade’s thinkorswim® platform. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Fed Meeting

This week's two-day Federal Reserve meeting, which concludes on Wednesday, does not include a press conference. That means investors will scour the 2 p.m. Eastern statement for changes, updates, or fresh clues about the interest rate hike or hikes that most industry economists are banking on for later in 2015.

"In our opinion, the Fed is making it pretty clear that they believe economic conditions will be appropriate for a rate hike by year’s end. As such, the incoming data between now and September is critical as to whether a rate hike will ensue at that month’s meeting or whether expectations will be pushed back," says Sam Bullard, senior economist at Wells Fargo Securities, LLC.

Kinahan agrees. "We are still waiting for a date on a rate hike. It keeps everyone on edge and keeps volatility high as we head into the meeting conclusion.”

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