Stocks are set to open lower for the second straight day as crude oil continues to weaken and the market digests major earnings reports outside the banking sector.
All eyes were on oil yesterday and the front contract traded negative for the first time in history. This pressure is largely due to a glut of supply, plummeting demand, and a lack of storage space. While crude oil is a relatively unique commodity, the collapse in demand makes many market participants wonder about how weak the overall economy really is. If crude oil demand is this weak, then there must be repercussions in many other areas of the economy.
The other issue that is weighing on the market this morning is earnings. IBM (IBM) was the first major technology company to report. Its EPS was slightly ahead and revenue in line, but it withdrew its guidance for 2020 due to the COVID-19 crisis. This is going to be a very common theme this quarter -- and the reaction, in this case, is negative. The market is having difficulty discounting the future, and as a result, the stock is trading down over 4% in premarket trading.
Coca-Cola (KO) also reported, and stated that it cannot reasonably estimate its financial and operating results. It also noted that volume is down 25% so far in April. KO is trading close to flat.
The negative reaction to earnings combined with a market that is technically extended and hitting resistance levels is producing a drop in the DJIA of about 500 points a couple of hours before the open.
Many market players have been puzzled by the ability of the indices to hold up so well as an onslaught of poor economic news is about to hit. The market typically struggles with uncertainty and there is sure to be much of it during earnings season when there is little clear guidance.
Despite the negative narrative, there has been some strong support recently, which has created much "fear of missing out". The bulls believe that the power of the Federal Reserve is sufficient to produce a V-shaped recovery, and when that is combined with increased optimism about reopening the economy, there is limited downside.
The recent price action appears supportive of this thesis, but the reaction to earnings news, the drop in crude and other economic news will tell the story. We shall see if the dip buyers have the same level of resolve that they had yesterday morning, which was sufficient to drive the Nasdaq into positive territory for a while.
I see few positive technical setups to pursue right now and have limited trust in sustained upside momentum. I'll be watching the response to earnings to see if downside momentum is now set to build.