Not Much of a Selloff
- Stocks ‘sell’, finishing lower as a late rally fell just short of more gains.
- Housing woes continue to show up in the late 2010 numbers as 1 in 4 homes are in ‘negative equity’ posture.
- Fiscal and monetary policy lead to a terribly bifurcated economy.
- CSCO earnings disappoint again. Will they trigger another November-style pullback?
MARKET OVERVIEW
That is not much of a selloff.
Tuesday I discussed the SP500 spurting higher on top of an already long, strong rally leg and how that often signals a run is hitting its limits. The continued run higher finally drags in some of the unwilling, the latecomers who refused to enter the market again. Refused to enter, that is, until the rally was long in the tooth.
Wednesday it looked as if the market might indeed start to test back from that last more ballistic spurt upside. US earnings were just fine as Coke, AGU and TTWO, in a cross-section of sectors, all posted strong beats. Didn’t matter on Wednesday as the market was winded. Futures were lower as Asian markets sold following a holiday that saw China raise its interest rates 25BP. Europe struggled and the US saw no reason to change the pattern.
Stocks started lower but within the first hour moved positive, at least on NASDAQ. The old low to high looked to be in place again. Then a few new stories hit (housing, Bernanke) and the market struggled the rest of the session, similar to what the futures indicated. Stocks hit a new low in the mid-afternoon, but again put on a rebound in the last hour. They could have made it positive, but for a dip right at the midpoint of that hour. In the end only DJ30 turned positive, but the other indices cut their losses substantially with NASDAQ and SP500 losing just 0.3%, SP600 -0.5%, and SOX -0.7%. The Dow managed a 0.06% gain.
Not much selling. Basically a blip on the index charts. CSCO reported earnings after hours and as in November it disappointed investors, trading down 7%. Not the 15%ish drop in November, but the tone is similar. That report triggered NASDAQ’s November correction/pullback/test. With the indices on a run roughly equal of that from August to November, a similar pullback is not out of the realm of reality.
THURSDAY
Already time for the jobless claims but the story Thursday is likely earnings. Cisco reported after hours and it beat, but the stock was beaten. Margins were thinner than hoped. Now it was down just 7% after hours and that is ‘better’ than the slaughter in November when CSCO gapped down 4 points or 20%. That gap helped trigger NASDAQ’s November selloff.
This market is certainly set up for a pullback after a strong late December through February rally, a run similar to that spanning late August to early November 2010. SPY and QQQQ are down after hours but it is not a massive selloff.
Could this actually be a test for this uptrend, the trend that won’t give in? If the market is looking for a reason to sell this could easily be it. After all the market sold after Cisco’s last earnings. The market is in need of a test so why not just repeat the November action and get the next upside leg going already.
Sounds easy enough, but as you have seen, the market often does what no one expects or at least believe it should. I say the market needs a test and is ready for a test. After the increased tempo of the gain on SP500 the past week, it is certainly in position. Nothing other than its own success, however, condemns SP500 to a selloff.
So at this stage of the game you still look for opportunity but you are being patient and not loading up on any one play. There are great individual plays that are not extended, but with the overall market stretched, the risk/reward in general is potentially truncated. If the market sells off, three-fourths of stocks go with it.
Again, be patient, let the plays come to you. If they don’t they will before too long, and in the meantime look in the other direction in the event this Wednesday pause ahead of Cisco earnings turns into something November-like again.
