Rough Start to 2016 Could Continue; Select Stock-Picking Could Be in Order

Stock investors should brace for more potential volatility as 2016 trading stretches into week two and brings the launch of a fresh earnings round. The start to the year was the worst ever for the major stock averages—plagued by Chinese growth concerns and weak oil prices set against a backdrop of continued U.S. job market growth.

Last week’s pounding was widespread; the broad-based Stoxx Europe 600 suffered its biggest weekly loss since August 2011. The S&P 500 (SPX) had shed 6% through Thursday (figure 1) and it’s down nearly 9% from its all-time high set in May.

For traders, the volatility, and potential share-price discount, could present targeted opportunities. You may not have to dump your longer-term perspective and your approach to trading markets. Instead, volatility bouts like the ones to open 2016 may encourage you to cut back on trading size, or to widen your stops and targets.

On Friday, officials there set a higher yuan reference rate (it had weakened the yuan aggressively earlier in the week), suspended a controversial circuit breaker system that had halted stock trading twice since it was implemented at the start of the week, and directed state-controlled funds to buy local shares.

More Economic Tests
As for that jobs report, the U.S. economy welcomed 292,000 new hires last month, Labor Department data showed. The unemployment rate remained at 5%, largely because almost a half-million people joined the labor force.

Will new hiring translate into stronger consumer spending? Next week’s economic calendar ends with the monthly report on retail sales. It can hold potentially valuable clues for the rate-setting Fed on the pace of future interest rate hikes. See the full economic calendar below.

In fact, interest rate obsession could keep up interest in bond market action. The 10-year yield, a benchmark for the Treasury market and broader interest rate watchers, fell to near 2.14% last week. That was its lowest in about a month. Its decline works counter to the Fed’s efforts to remove easy lending conditions for an otherwise improving U.S. economy. The Fed lifted rates for the first time in nearly a decade in December, citing economic improvement but a tame-inflation backdrop.

We’ll also hear from the Fed this week. It’s “Beige Book” collection of economic anecdotes from each of its districts hits early week. The report can help investors read between the lines when it comes to current economic conditions.

Ready for Earnings?
Aluminum giant Alcoa Inc AA unofficially kicks off the earnings season with its post-close report on Monday. It can prove an important litmus test of industrial demand, including from global customers like China.

JPMorgan Chase & Co. JPM as well as other financials, along with Intel Corp. INTC are all scheduled to deliver results this week.

All told, S&P Capital IQ forecasts profits for S&P 500 members fell 6.7% in the Q4 period that will be revealed in this next wave of report cards.