Saturday, July 17, 2010

Economic Problems Overwhelm Earnings— Again!

¹²Economic Problems Overwhelm Earnings— Again!
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By Sy Harding | 17 July 2010

The market correction of Jan/Feb began as December quarter earnings began coming out, even though those earnings were impressive. The current, more serious, correction began in April when the March quarter earnings began to be released, even though they were also impressive. And, as in January, some of the companies with the best March quarter earnings saw their stocks sell off the most.

And here we are only a week into the June quarter earnings period, and although those earnings are again beating Wall Street's estimates, yesterday the market may have begun selling off again, given the big 262 point reversal by the Dow. (Or perhaps it was just a decline to retest potential support at the short-term m.a.). Three weeks ago, as I showed you at the time, the market had become short-term oversold beneath 21-day moving averages to a degree that almost guaranteed at least a short-term oversold rally.

I had warned that the resistance at the intermediate-term 20-week moving averages (next chart) was likely to halt the rally, as happened with the previous brief oversold rallies, since only the short-term technical condition had changed, while nothing had changed in the intermediate-term technical picture, or in indications that the economic recovery is stalling. If yesterday's big decline was the end of the rally it stopped just short of the 20-week m.a. But if it was the end of the rally it would still confirm that the m.a., which was typically overhead resistance in the 2007-2009 bear market, and then support through the bull market last year, is likely to again be significant resistance in rally attempts as the market correction resumes.

Either not understanding technical analysis, or not wanting to believe in it [[except for the 'quants', who use mostly their own, proprietary technical indicators: normxxx]], Wall Street and the media have to translate the situation into references to 'earnings' or 'economic reports', things most people can easily grasp. We can play it that way too, although we prefer to use both technical and fundamental analysis in our work. That fundamental situation is that even as bellwether companies in important business sectors, including Alcoa, Intel, Goldman Sachs, and General Electric, have reported healthy 2nd quarter earnings that beat forecasts, economic reports that were worse than forecasts continued to pile in.

This week's reports included that retail sales fell 0.5% in June; automobile sales fell 2% in June; mortgage applications for home purchases fell to a 13-year low; more than 600 smaller banks that have received TARP bailout loans could collapse or have to be taken over because they can't afford [[to pay back those: normxxx]] loans; small business confidence fell in June after several months of improvement; the U.S. trade gap worsened to $152.3 billion in May to its worst level in 18 months, prompting economists at J.P. Morgan and Macroeconomic Advisors to significantly lower their estimates of 2nd quarter GDP by 0.8 percentage points to 2.4%; the New York State Mfg Index unexpectedly fell to just 5.1 in July from 19.6 in June; the Fed's Philadelphia area Mfg Index fell to 5.1 in July from 8.1 in June; and yesterday it was reported that the University of Michigan's consumer sentiment index plummeted to 66.5 in July from 76 in June (the consensus forecast was that the July reading would be 74.3). And even the Fed weighed in this week with the minutes of its June FOMC meeting, which showed the Fed was more concerned in June about the economic recovery than it indicated in its announcement after the meeting. You might prefer to read more encouraging opinions, and Wall Street and the internet has plenty of them.

But I suspect if you're going to make profits in this kind of market, searching for 'second opinions' until you find one that supports bliss, while ignoring what is going on with the market technically, and with the economy's fundamentals, will not be the way to go.

Headlines Elsewhere:

Financial Times:
"The Great Re-regulation Turns Into The Great Escape. What happened to the Great Re-regulation of the financial industry? After the financial crisis, it was beyond argument that existing regulations had failed, and would need to be rethought. Only a few months ago it looked as though the Great Re-regulation might turn into the Great Revenge as politicians planned to squeeze the banks. Now it begins to look like it will be the Great Escape— for the banks."

Associated Press:
"Regulators Shut Down Six More Banks. Regulators on Friday shut down three banks in Florida, two in South Carolina, and one in Michigan, bringing to 96 the number of banks to succumb this year to the recession and mounting loan defaults."

Yesterday in the Markets.

That was ugly. Not a good way to send the market into a weekend. The market was down from the open, on still another string of negative economic reports, and closed just about on its low.

Volume picked up, with 1.5 billion shares traded on the NYSE, but that's usual for an options expirations day. Market breadth was decidedly negative, with a 4:1 ratio of declining stocks to advancing stocks on the NYSE, an a 7:1 ratio on the Nasdaq. The Dow closed down 261 points, or 2.5%. The S&P 500 closed down 2.9%. The NYSE Composite closed down 3.0%. The Nasdaq closed down 3.1%. The Russell 2000 closed down 3.8%. The DJ Transportation Avg. down 3.2%.

Yesterday's intraday chart:

The U.S. dollar ETF UUP closed up 0.2%. The Treasury bond ETF TLT closed up 0.5%. Gold closed down a big $16 an ounce, at $1,192, back under $1,200. European markets gave up earlier gains to close down. The London FTSE closed down 1.0%. The German DAX closed down 1.8%, and the France CAC closed down 2.3%.



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The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

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