Sour Earnings Reactions and Hormuz Tension Test the Market
Here's my game plan amid increased selling pressure and signs of a shift in character.
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The market is under pressure on Thursday morning following a poor response to major earnings reports and heightened tensions over the closure of the Strait of Hormuz.
Optimism about a potential deal between Iran and the U.S. has kept a bid under the market and drove the Nasdaq to a new all-time high on Wednesday, but the road to negotiations is proving to be more difficult than anticipated. Iran seized two container ships Wednesday and attacked a third. The Iranian parliament is working on a law to shut down all traffic from "hostile" countries and all others will pay tolls.
The stalemate over Hormuz is causing chaos in the commodity market and has pushed oil prices back over $100 once again. Pakistani mediators trying to bring the two sides together are concerned that the situation could deteriorate and escalate.
The Pattern That Has Worked
There has been a pattern in recent weeks where any setback in the Iran situation is greeted by reassurance from President Trump that the U.S. is in control and that it should be resolved shortly. The market responds with new buying as investors want to be long when the "War is Over" headline finally hits.
The certainty that a positive outcome will arrive soon has been the main catalyst for this huge run but patience is starting to wear thin.
Earnings Reactions Turn Sour
The other issue hitting the market on Thursday are poor responses to earnings from Tesla (TSLA) , ServiceNow (NOW) , Southwest Airlines (LUV) and IBM (IBM) .
There are some renewed worries about how AI is hitting software and the increased capital spending of Tesla is putting pressure on the stock. Those are two themes that hit during the last earnings period that have to be watched closely.
The Consensus Is Here
On Wednesday morning we discussed concerns that the popular business media finally seemed to have embraced the narrative we have been writing about for weeks. A combination of poor positioning, too much negativity and a Wall of Worry have been driving the historic market run. It has been several weeks of one-way action with hardly any dips at all. This has now become the mainstream view, and that is a problem.
We are now seeing signs that the character of the action is starting to shift and we have earnings and the Iran issue becoming justifications for taking some profits. Investors still want to be ready for progress in Iran but with the indexes overbought and near highs it is prudent to take some profits and raise some cash.
My Game Plan
My game plan is exactly that. I've cut back some of my winners and am playing stronger defense as I want to try to keep client accounts as close to highs as possible. Earnings season creates additional risk, especially when there is a big run, which creates an inclination toward a sell-the-news response.
We should continue to see good support, but there is plenty of room for pullbacks and dips. It is unlikely that we are going to see a sudden collapse, but I'm looking for a slowing of momentum and increased volatility on this news flow.
Related: Rally, Rest, Repeat. Is Breadth Strong Enough to Keep the Pattern Going?
At the time of publication, Rev Shark had no positions in any securities mentioned.
