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A Bull’s Market to Lose

Macro news is mostly positive, but key technicals are sounding the red alert.


Stocks tumbled on Thursday, closing at their lows, as serious glitches in eurozone negotiations with Cyprus, weakness in European economic data and earnings trip-ups on Wall Street blunted the positive effects of improved U.S. unemployment claims data.

Tech led the way lower following a stunning earnings setback reported by Oracle (NASDAQ:ORCL), while telecom was the only sector that ended higher. Crude oil was lower and gold was higher.

The main data pressure point globally was weaker-than-expected PMI data (a measure of global manufacturing) out of Europe. The flash eurozone composite PMI fell to 46.5 in March from 47.9 in February, the weakest level since November. Forward-looking components in both the manufacturing and services surveys deteriorated in March. There was slightly better news out of China as the HSBC flash manufacturing PMI pushed up to 51.7 in March from 50.4 in February, ahead of the 50.8 consensus.

Over in Cyprus, the only news was a decision that banks will remain closed until Tuesday. The closure was originally only supposed to last a day, so the one-week span is really putting pressure on negotiators as no one on the prosperous island has access to their funds. The European Central Bank is putting the screws on Cypriot lawmakers, saying that it will only continue to provide emergency liquidity assistance through Monday unless the government agrees to a bond bailout package that may include the hated expropriation from bank depositors.

The Cyprus government remained focused on what it calls Plan B, with party leaders reportedly agreeing to create a “solidarity fund” that would combine state assets with an emergency bond issue. However, the big concern was the continued pushback by lawmakers against the deposit levy demanded by the troika. The real danger is that Cyprus may elect to make Russia its sugar daddy, and that would potentially deliver a Cypriot warm-water naval base over to Russia, the first such concession in Cypriot history. Will the eurozone really force the Cypriots into a deal that would hand over the island’s financial future for lousy 10 billion or so euros? Could they be that naïve?

In the United States, data was mostly positive — but not spectacular. The slow grinding improvement continues. The Philadelphia Fed index jumped to +2.0 in March from -12.5 in February, ahead of the -3.0 consensus view. Both the shipments and employment components accelerated in March.

Employment also continued to be a bright spot, as new jobless claims data showed more improvement. Initial claims rose to 336,000 in the week-ended March 16, which beat the 340,000 consensus.

On the other hand, the housing recovery theme was tempered a bit as existing U.S. home sales rose a less-than-expected 0.8% month-over-month in February to a 4.98 million seasonally-adjusted annual rate. However, supply did pushed up to 4.7 months from 4.4, but remained well below the year-ago level of 6.4 months. In addition, alongside improving consumer balance sheets, the median price increased 11.6% year over year, which is fantastic.

The only really big problem in the United States came from the corporate earnings calendar, which is where the rubber really meets the road. Oracle fell 9.7% after posting disappointing fiscal third-quarter results and issuing soft guidance. On the plus side, the company attributed the softness to execution issues, rather than macroeconomic trends. Also falling off the rack was contemporary apparel maker and chain Guess (NYSE:GES), which fell 7.2% after reporting weaker-than-expected earnings and outlook, and has recouped only a few cents this morning.

Putting it all together, the big picture is that stocks pulled back from an overbought condition in the face of some moderately poor news in Europe. The economic trends are still mostly positive, but now investors are starting to get their first look at first-quarter corporate earnings results — and they are starting to get worried. Earlier in the week FedEx (NYSE:FDX) was clobbered on weaker-than-expected results, and now Oracle and Guess are following suit.

Investors will start to extrapolate the worst from there, especially since many major industrials and some important financials are starting to show dreaded double-tops with lower highs on the right side, such as the ones shown above. On the other hand, if you’ve been following other blue-chips like McDonald’s (NYSE:MCD) and 3M (NYSE:MMM) (which was Monday’s Trade of the Day), you have been steadily raking in the profits.

All things considered, this is still the bulls’ market to lose, but the action shown the charts I included above is a red alert that you need to be ready to switch sides at a moment’s notice going into April. I have quite a few potential short and put ideas lined up for when the moment is right, so stay tuned.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

Professional traders and hedge funds make huge profits off volatility.  Now, Jon’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX.  Get more information on Trader’s Advantage and CounterPoint Options today.

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