We are in the midst of earnings season. An overwhelming majority of reporting companies have beat estimates, although you wouldn’t know it by looking at stock market action. Even though 70% of companies are reporting upside earnings surprises, that positive potential is being annihilated by the negative effects of 60% declaring revenue shortfalls. Investors apparently want to see top line growth, not just good management of the bottom line.
Caterpillar (CAT) is a typical example. Quarterly earnings surged 32% and came in ahead of estimates. However, revenue grew by only 5%, about 2% less than expected. Additionally, the company lowered both revenue and earnings guidance for the remainder of the year. As a result, the stock shed nearly 5% of its value in a very short time span.
Technology stocks appear to be reacting more negatively than the constituents of any other sector. Google (GOOG) is the most notable example. It combined its 7% earnings decline with an accidental early release of the report itself, causing shares to plunge about 10% midday and prompting a trading halt.
A two-day FOMC meeting concluded today. To nobody’s surprise, the Fed left interest rates unchanged, stating they would stay near zero at least through mid-2015. The Fed believes the economy is growing modestly while unemployment remains elevated. The FOMC reiterated its plans to continue its asset purchases until the labor market improves substantially.
The Presidential debates have concluded, and the candidates are in their final sprint. If you live in one of the hotly contested states, then prepare yourself for the advertising bombardment that is heading your way. We’ll only get a short break between the countdown to the election and the countdowns for two other events taking center stage. One revolves around the holiday shopping season, which will encompass five full weekends this year because of a relatively early Thanksgiving. The countdown to the fiscal cliff is likely to be the more ominous of the two, as the stakes appear to be much greater.
All but one sector lost absolute strength and momentum over the past week, so relative ranking improvements were primarily accomplished by the sectors showing the least relative weakness. Financials moved up a position to become the new leader. Health Care, a sector that typically turns in above-average performance when the market gets rocky, found itself among the worst performing groups this week and slipped down to second place. Consumer Discretionary and Materials both moved up a notch and are now tied for third place. Energy and Industrials also moved up, and the two are now tied for fifth in a lineup that seems to be showing more compression.
The weekly performance for Telecommunications was slightly better than that of the broader market, yet the group underwent a hard fall in the rankings, dropping from third to seventh. Utilities was the only sector to actually improve its momentum score, and that helped it climb another step out of the basement. Consumer Staples also failed to display its defensive characteristics and slipped to ninth place. Technology was the big loser on the week, but it was already in last place and couldn’t drop any lower. However, its additional weakness is easily visible in the Sector Edge Chart where it flipped over to a large negative trend reading.
The Style rankings look decidedly different this week with five categories flipping from positive to negative momentum readings. Additionally, the six categories still in the green have weakened considerably and are in danger of joining the downside group. Large Cap Value and Mid Cap Value hold on to the top two positions and are now essentially in a two-way tie. Mid Cap Blend moved up three spots to take over third, while Large Cap Blend held on to fourth. The rise of Small Cap Value to fifth puts all three Value categories in the upper half and ahead of the three Growth categories. Mega Cap, the leader just a few weeks ago, continues its slide down the rankings, this week providing the midpoint demarcation. The five categories below it all have negative scores. Small Cap Growth continues to occupy the bottom slot.
China was one bright spot in an otherwise dismal week for equities. It completed an impressive three-week climb from bottom to top a week ago and now has extended its lead over second place Europe. The third and fourth place occupants of Pacific ex-Japan and EAFE are also the same as last week. Emerging Markets and Canada swapped places as Emerging Markets gained a slight edge this week. There is no change in the relative rankings of the bottom five positions, although most are now weaker. The U.K., World Equity, and the U.S. lead this bottom group, but the U.S. is on the verge of flipping over into a negative trend. Nearly all international markets gained on the U.S. this week despite a stronger greenback. Latin America failed to defend its small positive trend and finds itself in the red today. Japan managed to improve its momentum, but it was not enough to erase its negative score or to move it up and out of the basement.
“It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let that thought be written indelibly on your mind.”
Jesse Livermore, early 20th century trader
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