The Market Is Walking on the Edge of a Cliff

by James Brumley | July 13, 2012 8:40 am

There’s an old saying that every state in the Union seems to have claimed as its own: “If you don’t like the weather in (insert your state here), just wait five minutes.” It’s a cliché, but not a meaningless one — the weather can and does stop and turn on a dime in all 50 of this nation’s states.

The market’s winds have been changing a lot lately too, not every five minutes, but at least what seems like every day. The net result is a go-nowhere environment; the S&P 500 is right back where it was in mid-May, although it’s been all over the map between then and now.

The listless environment has also made life miserable for stock-pickers, as I discussed on Thursday[1]. In that commentary, I also offered six tips for surviving this kind of market, but since we have time — the market’s not apt to start moving again today — I’d like to expand on one of the more important six tips I listed: “think holistically.” So, here’s a bigger-picture look at, well, everything … everything that matters, anyway.

Stuck in the Middle With You

While I have access to some of the fanciest trading tools in the world, more than a decade’s worth of real-life experience has pretty much convinced me that the simplest tools are the most effective. And it doesn’t get any simpler than moving average lines. Unfortunately, we’re not getting any meaningful clues from them right now. Heck, it’s the S&P 500 being tangled in the middle of all its key moving averages that verifies the market is trapped between a rock and a hard place.

I do see some key lines in the sand that are holding up, though.

sp500 300x203 The Market Is Walking on the Edge of a Cliff
Click to Enlarge
I know Fibonacci lines might as well be stock-picking astrology for some of you. But, I also know they’ve acted as floors and ceilings more often than not, especially when there was no other floor or ceiling in sight. There’s a big floor at 1,305 for the S&P 500. As long as the index stays on that side of the fence, I’ll stay in the bullish camp.

Earnings … Not So Good

The good news is, nobody really expected much on the Q2 earnings front[2]. The bad news is, stocks have struggled to even deliver on those lowered expectations.

Alcoa (NYSE:AA[3]) for instance, got earnings season off on the wrong foot. Oh, the aluminum company topped earnings estimates of 5 cents by bringing home 6 cents per share[4]. Problem is, that was way below the year-ago figure of 32 cents. Worse, with aluminum prices projected to keep falling, earnings could keep falling.

Marriott (NYSE:MAR[5]) and Fastenal (NASDAQ:FAST[6]) reported this week, too, with each topping last year’s comparable, and with Fastenal topping this year’s Q2 estimate. SAP Software (NYSE:SAP[7]) told the market to it was going to beat earnings estimates. Signs of hope? Not so fast.

While only a handful of major corporations have posted last quarter’s results, a whole slew of technology companies this week warned to not expect much[8] when their second-quarter and foreseeable future numbers come out. Applied Materials (NASDAQ:AMAT[9]), AMD (NYSE:AMD[10]) and Adtran (NASDAQ:ADTN[11]) were on that list, along with 23 more of the tech names in the S&P 500.

Standard & Poor’s still says the S&P 500 is on pace to earn $25.18 for the second quarter, which is the best Q2 ever, and would be the second-best quarter ever for the index. But that July 5 outlook surely doesn’t yet reflect all the tech stock warnings.

It’s a liability simply because the market hates surprising disappointment. Traders can handle falling income, but they react very badly to nasty surprises.

Any Excuse to Be Bearish

With all that being said, there’s another, subtle clue we all may want to absorb; traders seem to be looking for a reason to be bearish.

Did you notice what happened to most other grocery companies Thursday after SuperValu (NYSE:SVU[12]) posted Q2 results that were nothing less than horrible[13], then drove the nail in the coffin by warning things could be getting worse before they get better? What should have been good (or at least not bad) news for them torpedoed Supervalu’s competitors like Safeway (NYSE:SWY[14]) and Kroger (NYSE:KR[15]). When Cummins (NYSE:CMI[16]) warned its Q2 numbers would be weak, traders took it out other industrial names like Caterpillar (NYSE:CAT[17]) and General Electric (NYSE:GE[18]) regardless of whether they deserved the punishment.

Point being, investors are willing to sell at the drop of the hat … another stumbling block.

Bottom Line

Yep, it’s a good news/bad news situation, with the scales tipped toward the bad side of things. However, it’s better to respond to what the market is doing rather than what it should be doing. What it is doing, via the S&P 500, is holding above a couple of key technical levels around 1,305. Until and unless that floor breaks, the downsides don’t quite matter.

Just keep in mind stocks are a little lot more vulnerable than usual right now, and if that floor breaks, things could get real ugly in a hurry.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. discussed on Thursday: http://investorplace.com/2012/07/how-to-handle-this-listless-go-nowhere-market-environment/
  2. nobody really expected much on the Q2 earnings front: http://investorplace.com/2012/07/bracing-for-an-ugly-earnings-season/
  3. AA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AA
  4. bringing home 6 cents per share: http://investorplace.com/2012/07/lackluster-alcoa-earnings-cant-take-shine-off-this-stock/
  5. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR
  6. FAST: http://studio-5.financialcontent.com/investplace/quote?Symbol=FAST
  7. SAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAP
  8. warned to not expect much: http://investorplace.com/2012/07/wall-street-earning-warnings-bloodbath/
  9. AMAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMAT
  10. AMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMD
  11. ADTN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADTN
  12. SVU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SVU
  13. posted Q2 results that were nothing less than horrible: http://investorplace.com/2012/07/supervalu-the-poster-child-for-supermarkets-woes-svu/
  14. SWY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWY
  15. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  16. CMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMI
  17. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  18. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE

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