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Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.” — Leonardo da Vinci
Wall Street may be about to reverse the uptrend that it has been riding for the last four months, as a combination of technical signals and earnings reports hold the potential to knock the equity market down a few notches.
In spite of the recent blessing from the Fed in the form of a new round of quantitative easing, and the recent positive jobs numbers, which featured a sub 8% unemployment rate for the first time in about four years, the market seems to be mainly skittish, apparently in response to the latest indecision of Spain to jump onto the bailout train.
But is a deepening recession across the pond really investors’ main concern? Or are things really so different now than as recently as early September?
Investors have certainly shrugged off eurozone concerns on multiple occasions over the recent four-plus month Bull Run, even though the domestic economy revealed itself to be in a weaker state of recovery than many economists and financial pundits had assumed. So what gives?
Maybe it is the expectations of a poor earnings season, though so far the numbers haven’t warranted the fear, with a slight majority of the 34 S&P 500 companies that have reported last week beating earnings estimates. On the other hand, the bar for earnings this season has been acknowledged to be set toward the low side. A better reading on the corporate hit-or-miss scorecard will occur this coming week, as approximately 15% of the S&P 500 will report during this period.
Other factors that could be keeping investors’ fingers on the sell button could include the uncertainty emanating from the presidential elections, thought the post-debate shift in the polls from Obama to Romney would, one would assume, prod Wall Street toward more buying than selling. However, as the market certainly abhors uncertainty, perhaps the fact that the election is more of a toss-up now than at any time in the last several months could be causing nervous players to back off a bit from previous positions.
We could also simply be witnessing a consolidation period, as both the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) are back to where they were four weeks ago, a natural place to be following any normal round of profit-taking by funds and institutions, in response to the rise in the market going back to June.
Or perhaps the recent down week, which saw the SPX shed 2.2% and the DJIA drop slightly more than 2%, was symptomatic of a recognition that the global economy is shifting back to the down side, and that stimulus measures by the world’s leading central banks may not be sufficient to stem a return into a broader recession.
A recent report by the International Monetary Fund (IMF) referenced an expected drop in global GDP, estimating an extremely weak 3.3% rate of growth for 2012. If this number pans out, it would be the slowest growth rate for the global economy since 2009. We are seeing the slowdown in stark terms in both the eurozone and in China, though not quite at the same rate in the U.S. At least not yet.
So investors may be merely catching their breath and assessing the lay of the land, or pulling back capital to places of decreased risk in a belief that the fundamentals for growth are lacking for the foreseeable future.
One thing to consider, if you happen to pay attention to the technical aspect of the market, is that the uptrend that has been in place for most of the last five months may have been compromised, and though it can not be seen as a clear sign of a reversal, it certainly warrants paying close attention to the next wave of domestic data, earnings reports and, particularly, the action Spain ends up taking, which can be regarded as something of a bellwether for the direction the eurozone may travel.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
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