An index graph displays Russian stock price fluctuations at the Moscow Exchange MICEX-RTS PJSC in Moscow, Russia. (Photographer: Andrey Rudakov/Bloomberg)

U.S. Stocks in No-Man's Land After the First Sideways Week of 2019

(Bloomberg) -- This week brought something new for stock investors whiplashed by December’s drubbing and subsequent January snap-back: a lull in the action.

The S&P 500 Index inched 0.2 percent lower this week as earnings season kicked into high gear, its smallest weekly move since October. That leaves the gauge up 6.3 percent in January after the 9.2 percent tumble in December.

U.S. Stocks in No-Man's Land After the First Sideways Week of 2019

But is this the pause that refreshes, or the eye of the hurricane?

The equity rally “has lost some of its sparkle as the mood turns slightly more risk-off than a week ago,’’ Aliza Mason, an equity derivatives strategist at Grupo Santander, wrote in a note. That’s left investors stuck “halfway between hope and despair.’’

A market unable to climb a wall of worry in the fourth quarter is proving much more adept at scaling the rocky stretches in 2019. Equities held their own in the face of the longest ever U.S. government shutdown, mixed messages on trade negotiations with China, a downward revision to global growth forecasts from the International Monetary Fund and the underwhelming results and outlook from America’s largest chipmaker, Intel Corp.

A jam-packed calendar for the week ahead will put this rediscovered resilience to the test as traders digest the implications of the temporary deal reached to reopen the government.

Volatility Inversion

Quarterly results from tech heavyweights including Apple Inc., Microsoft Corp., Inc. and Facebook Inc. are on the docket. An update from global industrial bellwether Caterpillar Inc. is also due, while reports from Mastercard Inc. and Visa Inc. will shed light on the state of the American consumer. A Chinese delegation will arrive in Washington Monday to talk trade ahead of Vice Premier Liu He’s arrival later in the week.

Oh yeah -- and there’s a Federal Reserve meeting and January’s non-farm payrolls report looming as well.

Add it all up, and it’s little wonder that investors are wagering on bigger price swings over the next week than the next month, creating a so-called term structure for S&P 500 volatility that resembles the big dipper.

Generally, implied-volatility curves slop upward because the outlook becomes more uncertain the further out in the future one attempts to predict. This inversion shows just how high the stakes are for next week.

“Next-week vol is trading at a premium, reflecting the event risk around the January FOMC meeting, as well as the Brexit vote and payrolls,’’ said Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo.

U.S. Stocks in No-Man's Land After the First Sideways Week of 2019

Should the majority of these pending major events break the same way, the sideways stretch for stocks might not last too long.

About a quarter of the way through the reporting season, earnings have been a mixed bag. About 70 percent of companies have beaten earnings estimates and 58 percent surpassed sales forecasts, but the average revenue surprise has been negative. If sustained, that would mark the first quarter sales missed in aggregate in at least two years.

“The sentiment-driven rebound, or buying justified by the argument that the selloff went too far, is coming to an end,’’ Dennis Debusschere, the head of portfolio strategy at Evercore ISI, wrote in a note to clients. “Another sharp decline remains a low probability event, but new energy is needed to push the market meaningfully higher near term.’’

©2019 Bloomberg L.P.