Market whipsaw and volatility – expect more of it
Investors and traders who have a long bias were cheering yesterday as the markets had their best day in some time. But what is there to get so excited about? While the session did provide a momentary respite from the negative sentiment of the last two weeks, I think it’s worthwhile to bring us back to reality on the position of the market.
From a longer term perspective, yesterday’s move did nothing to change the picture, which for me still shows weaker equity markets going forward. The consolidation across the four major indexes (^DJI, ^GSPC, ^IXIC, ^RUT) that commenced in April is still in place, and I see nothing on the horizon suggesting that a breakout is close to occurring. All yesterday’s rally did for me was to serve as a reminder that volatility will be here for the foreseeable future.
Three reasons why the markets will probably head down again
While no breakout looks to be in the offing, by contrast, I still see some issues that make a drawdown more likely. Three technical observations that continue to concern me are the following:
(1) The continued inability for the Nasdaq composite to engineer a sustainable move back to 5000 (and back in April the 50-day moving average crossed below the 200).
(2) The Russell 2000’s lack of conviction over the last month and its inability to move back to 1163.
(3) The 50- and 200-day moving average on the S&P 500 hourly chart continue to diverge with the 50 crossing below the 200 last week. In the last year, this hourly “death cross” happened in a meaningful way twice, which preceded pullbacks of 10% and 12%.
While there are more negative possibilities in the market than positive ones, right now the broad indexes are neither overbought nor oversold. Back and forth action, coupled with momentary spasms of volatility will probably be with us for some time to come.
Business anachronisms — Gap and Disney must innovate
Two first-quarter reports this week reminded me of the need for companies in all industries to remain nimble, continue to innovate, and to keep an eye on the changing competitive landscape. Gap Stores (GPS) and Walt Disney Company (DIS) both reported this week, and the Street was underwhelmed to say the least.
Gap had same store sales declines in Old Navy, Banana Republic and its original eponymous outlets, which spells future trouble for the retailing giant. Meanwhile, Disney did have sales and earnings increases over the same quarter of 2015, but it missed on the top and bottom from the estimates and is currently getting punished for it.
Both reports underscored the need for businesses to continually improve or risk being an anachronism. Gap was outflanked by the fast-fashion outlets of Zara and H&M (among others), and unless it changes up the model—and quickly—it will continue to see same stores sales and market share declines. The inability of Gap to respond to rapid changes in customer tastes has hurt it in the past, and it looks like it is hurting them again.
Cord cutters are making ESPN's business model obsolete
Disney executed very well in its movie studio business, but it continues to be dragged down by ESPN and its shrinking subscriber base (despite ESPN’s improved margins this quarter). ESPN was once the crown jewel in the Disney family of properties, but it is falling victim to an avalanche of customers who are cutting the cable cord and have no way of taking ESPN with them.
These customers made the decision that a lack of sports programming is less important to them than saving $150-$200 a month by dumping cable—and ESPN with it. Until Disney changes its ways with how ESPN is packaged and distributed (via Netflix or Amazon Fire, for example), it will continue to bleed subscribers.
I doubt either company will be filing for bankruptcy anytime soon, but they do have to get these issues reconciled if their respective stocks are to perform. More importantly, these two situations remind us as traders that companies who stay current and stay relevant or the ones that will command the premium multiples. The others will find themselves labeled as anachronisms.