Courtesy of The Pragmatic Capitalist
I still maintain that the rest of earnings season will be broadly positive, however, two negative trends have developed over the course of the last few days that have changed my market outlook from bullish to neutral.
The first change in trend has been the recent spat of “selling the news”. After the 6% run-up since the beginning of earnings season we are now seeing investors sell into strength. This is a clear sign that the buying power is waning. In essence, the owners of equities now have more incentive to sell than new buyers have to buy mainly because earnings were largely priced in over the course of the last few weeks. A new positive catalyst will need to develop from here for stocks to make a substantial move higher.
The second negative trend is the move in the dollar. Today’s nearly 1% decline in the dollar index is staggering. The negative trajectory of this move is simply unsustainable. I also believe the $1.50 mark in the Euro is one that will not be tolerated for long. Compounded by the move in the dollar is the surge in oil prices. It’s only a matter of time before analysts become increasingly concerned about the impact of high oil prices on consumers. Any move higher in the dollar (for whatever reason – short covering, politics, etc) will weigh on the market.
For these reasons I think it is prudent to take a step back from the poker table and take a break. Although I am not shifting to a short position I do view this market as one that is characterized by abnormally high risks. The strength could very well continue through the next 3 weeks of earnings season, but after the 6% surge over the last 4 weeks I think it is prudent to take profits here.
Sometimes when you’re sitting on a strong hand you need to realize that the risks outweigh the rewards and that perhaps your hand isn’t quite as strong as you think….