Markets at Crossroads
Last week had all the excitement the short term traders crave. Breakouts to new high on indexes followed by a reversal followed by no follow through. End result, markets are where they are. The month end effect should keep the market in stalemate stage for sometime.
Earnings trends:
So far the earning season has been good. Companies have mastered the art of setting low expectations and beating them. But early trends indicate yet anther double digit growth in earnings. So in absolute terms earnings are good.
The problem is forward guidance. For the first time after a series of good quarters, the forward guidance is uniformly lacklustre. So far the sector picture emerging from the earnings favor insurance, financial brokerage and material sector. Many of the stocks in this sector have already rallied in anticipation of this.
Interest rates and inflation
If you go back few quarters, the market theme was slowdown in US economy. Depending on who you listened to, there were extremists predicting doom and gloom and there were others predicting resilient economy. The bonds were moving in the recession camp. Now with more data coming in inflation seems to be back as the theme. Contrary to the predictions of the gloom and doom camp the world economies have accelerated growth and in countries after countries inflation fighting measures are being taken to slow down growth. Rising interest rates are never good for the markets.
Leading stock action
When the leaders falter be careful. The leaders which lead the rally since July are stalling and in many cases exhibiting signs of blowout moves or reversal. Look at stocks like AAPL, RIMM, GOOG, IAAC, GROW, CSH, MWRK, LCC, AMR, etc. They have stalled and not moving forward.
The Investors Business Daily indicator of distribution days on Indices shows 3 days for Nasdaq and 3 for S&P in last 4 weeks. 4 plus levels are indicative of short term tops.
My own Stocks Up %0% or More in a Month indicator is at 3. That indicates lack of market momentum at individual stock level. In a rising markets the levels are between 10-20. So at individual stock levels there are very few strong moves.
Overall we are at an interesting crossroads and the probability of next move down is high. The only sector which seems to be attracting longer term interest is Technology, where the earnings are not so good but there are number of breakouts post earnings. So probably there is an anticipation of better days ahead in few quarters.
Earnings trends:
So far the earning season has been good. Companies have mastered the art of setting low expectations and beating them. But early trends indicate yet anther double digit growth in earnings. So in absolute terms earnings are good.
The problem is forward guidance. For the first time after a series of good quarters, the forward guidance is uniformly lacklustre. So far the sector picture emerging from the earnings favor insurance, financial brokerage and material sector. Many of the stocks in this sector have already rallied in anticipation of this.
Interest rates and inflation
If you go back few quarters, the market theme was slowdown in US economy. Depending on who you listened to, there were extremists predicting doom and gloom and there were others predicting resilient economy. The bonds were moving in the recession camp. Now with more data coming in inflation seems to be back as the theme. Contrary to the predictions of the gloom and doom camp the world economies have accelerated growth and in countries after countries inflation fighting measures are being taken to slow down growth. Rising interest rates are never good for the markets.
Leading stock action
When the leaders falter be careful. The leaders which lead the rally since July are stalling and in many cases exhibiting signs of blowout moves or reversal. Look at stocks like AAPL, RIMM, GOOG, IAAC, GROW, CSH, MWRK, LCC, AMR, etc. They have stalled and not moving forward.
The Investors Business Daily indicator of distribution days on Indices shows 3 days for Nasdaq and 3 for S&P in last 4 weeks. 4 plus levels are indicative of short term tops.
My own Stocks Up %0% or More in a Month indicator is at 3. That indicates lack of market momentum at individual stock level. In a rising markets the levels are between 10-20. So at individual stock levels there are very few strong moves.
Overall we are at an interesting crossroads and the probability of next move down is high. The only sector which seems to be attracting longer term interest is Technology, where the earnings are not so good but there are number of breakouts post earnings. So probably there is an anticipation of better days ahead in few quarters.
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8 comments:
I'm not 100% sure if foreign governments are looking to raise rates yet. Look at the Yen, it has fallen considerably so far in January and it seems that of all currencies, this one deserved an interest rate hike the most. Of course, I am not sure if Japan is a good proxy for the rest of the world.
If foreign governments are not meeting expectations by raising rates this could challenge the idea that their economies are as robust forward looking as their ETFs show.
Looks like more upside in the future: http://tickersense.typepad.com/ticker_sense/2007/01/january_29th_bl.html
Pradeep is right that bloggers are usually wrong.
boring market today...
looking weak under the hood, though
Hey, F, isn't Pradeep a blogger?
LOL!
Seriously, I've got some suggestions for Tickersense coming in a post soon ...
I'm just a bit under the weather today, but there were number of good breakouts and as usual earning lead breakouts dominated the action. The sector rotation theme continues with new stocks and sectors breaking out.
Hopefully will be back with more posts tommorrow.
Most of the predictions that I read on blogs function as a good proxy for what the retail trader is thinking. Well, he usually gets screwed. Remember, it is the public that provides Wall Street with its cushion.
After seeing that sentiment poll, I am quite convinced that we will see more highs in US stocks in the next few weeks (though I think we are going to see some more weakness in the very near term). Big funds are not interested in selling stocks down on themselves. The distribution process is a long, calculated and arduous one. They need a large, frenzied public bid on which to dump their shares. That massive absorbing power is less likely to exist when everybody is feeling bearish.
Look at FXI's gargantuan volume leap recently. That, right there, is Goldman Sachs dumping its shares on dumb money. Sure it may swell a little higher for the momentum/swing traders, but can you say LONGER TERM TOP? It happens like this every time.
I'll chime in with my take on dumb money, dumber money, and smart money. And I'll include their track records.
1. Dumb Money: While it's fun to point the finger and call bloggers dumb money, look at the bloggers' track record in the chart below. More bullish in August when the rally started, and it tapered off as the rally aged.
http://tinyurl.com/yofkmu
2. Dumber Money: Investors Intelligence survey linked below. They were very bearish when the summer rally started, and now they are super bullish.
http://tinyurl.com/2ufz4
3. Smart Money: Right now, John Hussmann is super bearish. He seems to have a pretty good track record of avoiding corrections - here's a chart.
http://www.hussmanfunds.com/pdf/hsgperf.pdf
He publishes a weekly market comment on his website.
Cool charts.
The first chart shows that not even 50% of bloggers thought this was the start of a bull rally in the fall and then they clearly missed the rest of the rally as the bulls stepped away for the rest of the year. There have been consistently more bears than bulls throughout this rally. This shows that the bloggers' leaning has been bearish. I'm not quite sure how it can be argued that more bloggers have been right than wrong as the markets climbed.
The second chart just shows that investors react positively to price increases and negatively to lower prices. At least this dumb money does not try to call tops and bottoms and does not fight the trend.
Hussman shows how well his fund did in a bear market but his performance in the recent bull market has been lackluster. Just compare the recent slope of his equity curve against that of the others. He seems to be more risk-averse than anything so of course he would anticipate a correction. I think most people recognize the increased risks of the market going into spring with oil's seasonal strength, increasing interest rate hike odds, etc. And there is probably a significant amount of distribution going on right now but the bull is innocent until proven otherwise through price, not speculation.
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