This week 3 market bellwethers — Caterpillar, Oracle and FedEx — all missed their earnings targets. Predictably, the overall market shrugged off this news, preferring to instead focus on Bernanke’s promise to continue repurchasing illiquid debt from banks’ balance sheets at a rate of $85 billion per month. This excess liquidity has been driving up the prices of stocks, real estate and commodities for the past several years, so the market’s habit for shrugging off bad news is familiar in this bull market cycle. But can stocks continue ignoring bad news forever? The chart below shows the returns for CAT, ORCL and FDX for the past quarter:
In a bull market, we expect leadership from risk-on sectors like Industrials (CAT and FDX) and Technology (ORCL). The graph shows that CAT’s price action has been sounding an alarm since mid-February, when it decoupled from the bull market and turned negative. CAT’s reaction to their earnings miss was therefore less severe than that of ORCL and FDX, which had been participating in the rally until announcing their earnings misses this week. The market reaction was swift, as these misses were largely unexpected.
In the old days, pundits like Louis Rukeyser and Marty Zweig (both watching the big tape in the sky now), would have called strike three on this troubling trifecta of news. If CAT’s not selling as many bulldozers as they thought, doesn’t it mean the global construction boom is slowing? If FDX isn’t growing its shipping business, doesn’t it mean global commerce is slowing? If a technology sector leader like ORCL is surprised at how slowly its profits are growing, doesn’t it mean they’ve overestimated businesses’ ability and need to buy and use their database and business knowledge products? Well, that’s what these signals used to mean — before euphemisms like “Quantitative Easing” were introduced into the vocabulary.
From a technical perspective, all three stocks have broken below their 50-day moving averages, with CAT and ORCL sitting right on their 200-day moving average. FDX still has a few dollars of leeway before it touches its 200-day MA. Nervous territory for investors in these stocks, to be sure.
For the more intrepid out there, however, the S&P 500 continues chugging along, well above its 50- and 200-day MA:
These fundamental and technical developments add to my worry list, which began with my March 14 post S&P 500 Decouples from China and Brazil. Renowned technical analyst John Murphy lists such decoupling as a warning signal in his recent post on Wiley’s Capital Exchange Blog, John Murphy’s 5 Laws of Intermarket Trading.
It might be time to take off the tin foil hats, turn down the sound on CNBC, and do a little thinking for ourselves about the market’s prospects for spring and summer. Sell in May and go away worked well in 2011 and 2012 (although the market revived appreciably in late 2012). But, as Larry Kudlow is so fond of saying, no one ever went broke taking profits.
As the graph below shows, in the 4 months spanning November 2012 through February 2013, seasonally-adjusted housing permits have been 515,000 units larger than the non-adjusted permits number. Considering that the US had 838,000 housing permits pulled in the past 12 months, these miraculous adjusted numbers seem to fit the Fed’s “QE can fix the economy” narrative a little too suspiciously for my tastes.
It’s been an interesting quarter in global markets, with the S&P 500 up over 8% since the turn of the year. US stocks mirrored stronger moves in Chinese and Brazilian stocks through January. Since that time, China has steadily faltered, with Brazil following over the last week. US stocks have continued logging their 0.25% daily gain, however — at least for now.
If the world’s growth engines are signaling “time out,” how much longer before US stocks re-couple with the global trend and we get that long-expected correction? If a downward move starts, be nimble, and don’t expect a full -10% as in markets of yore. After a few percent to the downside, expect money to pour in from the sidelines as conscientious objectors try to make up for missing the turn-of-the-year rally.