Earnings Season Begins; Stocks Fall

Tuesday, January 12, 2010
Market Commentary:

All the major averages fell for the first time this year after a disappointing start to earnings season. Volume, an important indicator of institutional sponsorship, was reported higher than Monday’s totals on the NYSE and on the Nasdaq exchange which marked a distribution day and suggested large institutions were aggressively selling stocks. Advancers led decliners by nearly a 3-to-1 ratio on the NYSE and Nasdaq exchange. There were only 12 high-ranked companies from the CANSLIM.net Leaders List that made a new 52-week high and appeared on the CANSLIM.net BreakOuts Page, lower than the total of 55 issues that appeared on the prior session. New 52-week highs solidly outnumbered new 52-week lows on the NYSE and on the Nasdaq exchange, and new lows were near single digits which is a healthy sign.

China Raises Reserve Limits:

Stocks slid across the globe as concern spread that the economic recovery may slow down as governments begin to withdraw their massive stimulus packages. Overnight, China raised its reserve limits for banks which is designed to curb their explosive economic growth. Since the March bottom, China has played a pivotal role in leading the global economy out of the worst recession since WWII and has emerged as a strong economic engine. The threat of an economic slowdown in China spooked many investors which helped send shares lower on Tuesday.

Earnings Season Begins!

Over the next few weeks, earnings news will likely set the tone for the near term action in the major averages. At this point, analysts believe that combined profit for the average company in the benchmark S&P 500 surged +62% during the fourth quarter. If that occurs that will snap the longest earnings losing streak in history and will be the first quarterly increase in earnings since 2007. Remember, that it is extremely important to digest each companies results but it is equally important to see how each company’s shares react to earnings.

Market Action- Short Term Pullback, Market Consolidating Recent Gains

On Monday, we penned, “After three strong weeks of gains, the market appears to be showing signs that a near-term pullback might be in the cards. A slew of stocks negatively reversed (opened higher and closed lower) on Monday, which suggests a change in trend may unfold.” Therefore, Tuesday’s pullback was somewhat expected as the major averages (and leading stocks) pause to consolidate their recent gains. Is the rally over? No, but all we have to do is be cognizant of the fact that a near term pullback may occur and then trade accordingly. From our point of view, the current, 45-week rally, remains intact as long as the major averages continue trading above their respective 50 DMA lines. Until those levels are breached, the bulls deserve the benefit of the doubt.

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