Earnings Season Begins Stocks; Stocks Fall

Friday, January 15, 2010
Market Commentary:

It was disconcerting to see all the major averages negatively reverse on heavier volume than the previous week as investors digested a slew of economic and earnings related data. The heavier volume reversal for the major averages suggests that large institutions were aggressively selling, not buying, stocks. However, it was encouraging to see new 52-week highs still solidly outnumber new 52-week lows on the NYSE and on the Nasdaq exchange which is a welcomed sign.

Monday & Tuesday:

On Monday, stocks ended mixed after China reported record imports and the US dollar slid. After Monday’s closing bell, Alcoa Inc. (AA) officially kicked off earnings season as the company reported lackluster fourth-quarter earnings which set a negative tone for the rest of the week. On Tuesday, the major averages collectively fell for the first time this year after a disappointing start to earnings season and China raised reserve limits for its banks. The move was designed to curb their explosive economic growth. Since the March bottom China has played a pivotal role in leading the world out of the worst global recession since WWII. The threat of an economic slowdown in China spooked many investors.

Wednesday:

On Wednesday, stocks closed higher after Google (GOOG) threatened to leave China, the world’s largest internet market, on censorship issues. Several of Wall Street’s top bankers spent the morning testifying on Capital Hill about the 2007-2009 financial crisis. The bankers, whose companies collectively received more than $100 billion in government aid, spent hours explaining what happened during the crisis. The Financial Crisis Inquiry Commission was formed to examine and learn from what went wrong during that period. At 2:00PM EST, the Federal Reserve released its Beige Book which showed the economy continues to recover in many regions in the country.

Thursday:

On Thursday, it was encouraging to see stocks edge higher on weaker than expected economic data. Most of Thursday’s headlines occurred before the open, The European Central Bank held rates steady and said they will wait for further economic recovery before withdrawing emergency stimulus measures. Domestically, two important economic reports were released at 8:30 AM EST: weekly jobless claims and last month’s retail sales. Both reports missed views.

Friday:

Stocks closed decidedly lower on Friday after a slew of economic data was released: a mild consumer price index (CPI), a stronger than expected manufacturing report from the NY region, a solid reading on Industrial production, and a weaker than expected reading on consumer sentiment. Longstanding readers of this column know how much importance we place on paying attention to how the market reacts to the latest data. That said, last week’s reaction was lackluster at best.

Market Action: Stocks Getting Weaker; Uptrend Under Pressure

Several high profile companies reported their fourth quarter results but, so far, few have impressed the Street. The vast majority of companies are slated to report their Q4 results over the next few weeks which will give investors a better understanding of how companies fared last quarter. Analysts believe that the average company in the S&P 500 increased its earnings by +62% during the fourth quarter. If that occurs, that will be the first quarterly increase since 2007 and snap the longest consecutive losing streak in modern history!

For the most part, the major averages and leading stocks are beginning to weaken as investors continue to digest the slew of economic and earnings data. Until a clear picture can be formed as to how companies fared last quarter, one could easily expect to see more of this sideways action to continue. The market just completed its 45th week since the March lows and the rally remains intact as long as the major averages continue trading above their respective 50-day moving average (DMA) lines. However, it is important to note that all the major averages negatively reversed last week which suggests a near term change in trend may be on the horizon.

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