Earnings Warnings and Economic Outlook Weigh on Stocks

The broad markets are still not certain of what direction they want to take. The economic data showed more weakness than expected in the ISM Services data hitting 53% versus the 55% expected and down from 53.9% in November. This shows more concerns in term of the consumers spending that has been bubbling to the surface. Factory orders were up by 1.8% and better than expected. Inventory data at the end of the week will confirm how the sales were during the holidays relative to the orders. Overall the consumer continues to raise concerns for the broad markets and investors. The balance of the week the focus will return to the jobs data and then to earnings.

Speaking of earnings the warnings continue to rise in number. Corporations are lowering expectations as much as possible in hopes of beating the revised data points. The pre-announcement data released by Standard and Poors shows the 500 index with the highest level of negative guidance in the last five years. Estimated earnings growth for the fourth quarter is pegged at 6.3% well below the double digit growth experienced in prior years. Reuters confirmed the outlook stating, “it is the most negative guidance sentiment on record.” Their estimates for fourth quarter earnings growth is higher at 7.6%. Any way you look at it the negative sentiment relative to earnings is growing and that will not play well for stocks should the actual results for the fourth quarter disappoint.

Gold experienced a flash crash early in the day (10:14 am) with the metal falling $30 an ounce which triggered a halt in trading at $1215 an ounce. The move was shortly following the release of the ISM Services and US factory orders data. The metal finished the day slightly higher at the close near $1238 per ounce. The metal bounced off a test of the lows and managed to rally back near resistance. Is there an opportunity going forward? Watch and see if we can clear the $120 ish level first. Silver (SLV) is in a similar position after rising 5.3% off the lows and a continued move above the $19.65 mark is worth watching.

Yields on the ten year Treasury bond continue to be volatile as the rate declined to 2.96% today after clearing the 3% mark last week. The bounce in the bond ETF (IEF) is showing signs of hope, but it will have to clear the current downtrend in play off the October high. I am still not convinced the rally has legs, but if the economic data discussed above continues to disappoint the upside in bonds may find support and momentum short term. Worth watching to see how it unfolds going forward.

The dollar (UUP) was attempting to move higher and breakout from the double bottom and clear resistance on the upside. The reversal today is part of the process and worry in play. We will continue to watch the process and trend unfold. The yen has been declining against the dollar, but has found a floor or support near the $92.80 mark, watching to see if any upside materializes. The euro bounced on the reversal in the dollar today and we will watch to see what if anything presents an opportunity.

Scanning the sectors the telecom (IYZ), real estate (IYR) and utilities (XLU) are the few offering positive results on the day. Retail (XRT), industrials (XLI), basic materials (XLB), small caps (IWM) and transports (IYT) led the downside. The losers outweighed the winners and the current topping patterns are worth paying attention to after the S&P 500 index closes negative for the third consecutive day. Are investors taking profit and heading to the sidelines? Is there evidence of selling intraday into any strength? One could make an argument for both, but we will watch to see how this unfolds going forward in the first full week of trading in the new year.

Global markets didn’t fare much better with the EAFE index negative, Europe slightly positive and the emerging markets confirming a break of support. The news from China’s economy last week has not let up on the selling thus far. In fact, China (FXI) was down 1.7% on the day and is testing the lows from early November. A break lower is another negative for the global markets going forward.

Bottom line… the market is attempting to hold on to the uptrend, but the sellers are exerting some pressure on the downside short term. We have to exercise some patience currently and let this play out relative to the trend and momentum. The worries over the economy remain a concern and if that grows in strength the downside will become an issue relative to the short term outlook. Stops in place and protect the downside risk of your trades.