Wednesday was an ugly day for US stocks.
Not only did the S&P 500 erase all of its gains for the year, the tech-heavy Nasdaq logged its worst single-day performance since 2011. This happened after the major indexes opened higher for the day, squashing hopes that stocks were on track to recover from the losses they have suffered in a historically turbulent month.
The sell-off in equities was not surprising for those on Wall Street who had warned that it was a long time coming amid rising interest rates, restrictive US trade policy, and lofty valuations for some stocks. At the same time, other pros saw it as a pit stop in the historic bull market, which they expected to be elongated by economic growth.
As stocks attempt to make a comeback on Thursday, we’ve rounded up commentary from Wall Street strategists on the latest bout of turbulence, and the actionable ideas they have for traders.
RBC Capital Markets: Our fears are becoming a reality
From what Lori Calvasina and her team gather, investors are more nervous now than they were during the February sell-off.
“Our original fears for this reporting season are coming true,” Calvasina, the head of US equity strategy, said in a note on Thursday.
They expected a bumpy ride due to the impact of a stronger dollar and margin pressures. Although few companies have raised these issues during their earnings call, Calvasina sees them as part of a growing list of things to be worried about in 2019.
She added that on the positive side, some companies have suggested they may amp up share buybacks, which have helped prop up the market at various times of weakness during this bull run. But there’s a catch: corporate America can rescue the market in the longer-term, but there could still be some short-term pain.
What to do
“We are currently in information gathering mode – still combing through this week’s earnings results and updating our market and sector valuation models for the latest drop on Wednesday,” Calvasina said. “But for the moment, we remain on the sidelines and are not yet buyers on the dip.”
Evercore ISI: ‘There are few signs of a recession’
The central thesis of Evercore’s Dennis DeBusschere and his team is that the sell-off has not been a reaction to macro news.
“Though some high frequency macro variables have worsened during the decline (oil, RIND, investor sentiment lower, credit spreads higher), the -9.4% decline in the S&P over the past month has exceeded what macro forces alone imply, continuing of a trend that has developed over the course of 2018 as more market-based measures have weakened despite strong macro fundamentals,” they said in a Thursday note.
These fundamentals include earnings surprises. Strategists at Bank of America Merrill Lynch said in a note earlier this week that many companies with profit growth above expectations were selling off the day after their earnings releases. It was the first such negative reaction since 2000, and to BofAML, signaled that investors feared peak earnings growth — another sign that the bull market is on its last legs.
But peak earnings growth does not equate to the top for profits, which explains why Evercore expects the economy to continue humming along amid the evidence of soft patches.
“Today, though the outlook for global growth has weakened some, and the pace of revenue and earnings growth is set to slow significantly, there are few signs of a recession, let alone a collapse in economic activity or financial markets.”
What to do:
The Evercore ISI Options team put together a trade to take advantage of rising front-end volatility via the VXX Short Term Futures exchange-traded fund. The VXX rises with spikes in futures of the CBOE’s volatility index, or VIX, and falls in periods of low volatility.
“The team recommends selling VXX November 48 calls and buying November VXX 38 puts for a total cost of $2.08. The strategy will become profitable as volatility declines or remains flat and the VXX decreases.”
CFRA: Stocks will be higher a year from now — but at a more sustainable trajectory
CFRA reminded its clients that October has historically been one of the most violent months for the stock market since 1950.
This stat is especially relevant for investors who are wondering whether the sell-off is a precursor to weaker fundamentals.
“Not surprisingly, some investors are questioning this bull market’s resolve,” the US investment policy committee said in a note Wednesday. “We think the S&P 500 will be higher a year from now, though its angle of ascent is being adjusted to a more sustainable trajectory, since GDP and EPS growth should face tougher comparisons in the quarters ahead.”
What to do
The charts are telling CFRA that “the stage is now set for a more substantial bounce and rally.”
“The NDX put in a higher low at the zone of support at 7025-7108 and the bias will shift to rotational and signal additional upside is likely on any move over 7158. Only a drop back below 7025 would hurt the currently favored larger bounce scenario.”