Economic Problems Overwhelm Earnings – Again!
Saturday, July 17, 2010. 11:00 am.
The market correction of Jan/Feb began as December quarter earnings began coming out, even though those earnings were impressive.
The current more serious correction began in April when the March quarter earnings began to be released, even though they were also impressive. And as in January, some of the companies with the best March quarter earnings saw their stocks sell off the most.
And here we are only a week into the June quarter earnings period, and although those earnings are again beating Wall Street’s estimates, yesterday the market may have begun selling off again, given the big 262 point reversal by the Dow. (Or perhaps it was just a decline to retest potential support at the short-term m.a.).
Three weeks ago, as I showed you at the time, the market had become short-term oversold beneath 21-day moving averages to a degree that almost guaranteed at least a short-term oversold rally.
I had warned that the resistance at the intermediate-term 20-week moving averages (next chart) was likely to halt the rally, as happened with the previous brief oversold rallies, since only the short-term technical condition had changed, while nothing had changed in the intermediate-term technical picture, or in indications that the economic recovery is stalling.
If yesterday’s big decline was the end of the rally it stopped just short of the 20-week m.a. But if it was the end of the rally it would still confirm that the m.a., which was typically overhead resistance in the 2007-2009 bear market, and then support through the bull market last year, is likely to again be significant resistance in rally attempts as the market correction resumes.
Either not understanding technical analysis, or not wanting to believe in it, Wall Street and the media have to translate the situation into references to earnings or economic reports, things most people can easily grasp.
We can play it that way too, although we prefer to use both technical and fundamental analysis in our work.
That fundamental situation is that even as bellwether companies in important business sectors, including Alcoa, Intel, Goldman Sachs, and General Electric, have reported healthy 2nd quarter earnings that beat forecasts, economic reports that were worse than forecasts continued to pile in.
This week’s reports included that retail sales fell 0.5% in June; automobile sales fell 2% in June; mortgage applications for home purchases fell to a 13-year low; more than 600 smaller banks that received TARP bailout loans could collapse or have to be taken over because they can’t afford the loans; small business confidence fell in June after several months of improvement; the U.S. trade gap worsened to $152.3 billion in May to its worst level in 18 months, prompting economists at J.P. Morgan and Macroeconomic Advisors to significantly lower their estimates of 2nd quarter GDP by 0.8 percentage points to 2.4%; the New York State Mfg Index unexpectedly fell to just 5.1 in July from 19.6 in June; the Fed’s Philadelphia area Mfg Index fell to 5.1 in July from 8.1 in June; and yesterday it was reported that the University of Michigan’s consumer sentiment index plummeted to 66.5 in July from 76 in June (the consensus forecast was that the July reading would be 74.3). And even the Fed weighed in this week with the minutes of its June FOMC meeting, which showed the Fed was more concerned in June about the economic recovery than it indicated in its announcement after the meeting.
You might prefer to read more encouraging opinions, and Wall Street and the internet has plenty of them.
But I suspect if you’re going to make profits in this kind of market, searching for second opinions until you find one that supports bliss, while ignoring what is going on with the market technically, and with the economy’s fundamentals, will not be the way to go.
Headlines Elsewhere:
Financial Times: “The Great Re-regulation Turns Into The Great Escape. What happened to the Great Re-regulation of the financial industry? After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago it looked as though the Great Re-regulation might turn into the Great Revenge as politicians planned to squeeze the banks. Now it begins to look like it will be the Great Escape – for the banks.”
Associated Press: “Regulators Shut Dow Six More Banks. Regulators on Friday shut down three banks in Florida, two in South Carolina, and one in Michigan, bringing to 96 the number of banks to succumb this year to the recession and mounting loan defaults.”
Subscribers to Street Smart Report: There will be a Special Report and hotline on the website for you by late afternoon tomorrow (Sunday).
Yesterday in the U.S. Market.
That was ugly. Not a good way to send the market into a weekend. The market was down from the open, on still another string of negative economic reports, and closed just about on its low.
Volume picked up, with 1.5 billion shares traded on the NYSE, but that’s usual for an options expirations day. Market breadth was decidedly negative, with a 4:1 ratio of declining stocks to advancing stocks on the NYSE, an a 7:1 ratio on the Nasdaq.
Yesterday’s intraday chart:
The Dow closed down 261 points, or 2.5%. The S&P 500 closed down 2.9%. The NYSE Composite closed down 3.0%. The Nasdaq closed down 3.1%. The Russell 2000 closed down 3.8%. The DJ Transportation Avg. down 3.2%.
The U.S. dollar etf UUP closed up 0.2%. The Treasury bond etf TLT closed up 0.5%. Gold closed down a big $16 an ounce, at $1,192, back under $1,200.
Yesterday in European Markets.
European markets gave up earlier gains to close down. The London FTSE closed down 1.0%. The German DAX closed down 1.8%, and the France CAC closed down 2.3%.
Global markets for the week.
Only a 1-week rally off the short-term oversold condition of two weeks ago? Perhaps.
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Emerging Markets not so negative? S&P 500 (indicators and signals on both short-term and Intermediate-term); and the potentially important market pattern for next week.
Please scroll down to see other recent ‘Interesting Charts of the Morning’ and commentary.
Next week’s Economic Reports:
Next week will be another fairly heavy week for potential market-moving economic reports including those related to the important housing industry; the Housing Market Index, Housing Starts, Mortgage Purchase Applications, and Existing Home Sales. To see the full schedule of the week’s reports click here, and look at the left side of the page it takes you to.
The 2nd quarter earnings reporting season will also continue of course.
I added my new weekend newspaper column ‘Is the Economic Recovery Just An Illusion?’ to the blog at noon-time yesterday. If you haven’t already read it you can either scroll down to it, or click here!
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