Markets Trade Lower on Earnings Data

Managing money is never easy, and today reflected that fact very well as the market sells lower on worries… Today it was data from the earnings side of the table as companies continue to miss estimates and it created a reaction with Microsoft warning and in turn falling 9.4%. Caterpillar missed earnings and dropped 7.1%. Big moves from big market cap stocks. Large cap stocks are showing they failed to hedge the risk of a rising dollar and in the case of CAT it felt the impact of less exploration relative to drilling for oil. The two uncertainties have been a strong dollars impact and price destruction in energy impacting the economic picture. Those worries are showing up in reality relative to earnings. This story is just beginning to unfold and the longer term outlook is still not clear how much more will transpire. I would believe there is more to come.

I talk regularly about the four components that act on the market in relationship to the trend: Technical, fundamental, structural and psychological. All four were at work today, and unfortunately, they were working in unison on the downside. Remember that the current micro-trend is sideways over the last six weeks. The importance of a consolidation type pattern in the trend is it shows investors are in the process of making up their collective minds about the future trend. There are two results… first, a continuation of the previous trend, which in this case is to the upside, and second, a trend reversal from the previous trend. Today’s activity didn’t result in either being confirmed, but it did rattle the psyche of the investor which over the last seven trading days was showing some signs of optimism. That just came to an abrupt halt. No real technical damage to the current pattern on the S&P 500 or NASDAQ 100 index, but it did move lower with in the range.

What is bothering investors? I can only speculate, but what is bothering me is simple… large cap stocks (MSFT, PG, MCD & CAT as an example) did a horrible job of hedging their risk relative to the rising dollar. That is putting pressure on the S&P 500 index, Dow and NASDAQ 100. All three are large cap indexes and reflect the worries from today. The Drop in oil prices impacting the global economic picture is showing up in the result from Caterpillar and I would expect more of this as move deeper into the earnings results from the industrials, basic materials and energy sectors. Earnings a a big disappointment thus far and it isn’t likely to improve near term. Throw in weaker economic data for the fourth quarter and the start of the FOMC meeting today and you can get a better picture of the story behind the move today… but, there is always tomorrow. The song from Little Orphan Annie is in my head, “Maybe the Sun Will Come Out Tomorrow!”

Dealing with one or even two of the components can be manageable for investors, but when all four are acting together on the trend it tends to morph into fear, which turns into selling. The question: are we at the point of fear within the selling today? Only time will give us the correct answer, but we need to manage our risk relative to the downside and commit to an exit strategy if things accelerate on the downside.

There is not substitute for planning your trades and trading your plan.