There are lots of reasons for the current rally to lose steam just about now. By many technical measures, it is extremely overbought. On a charting basis, the major indices are bumping right up against key resistance levels. At the very least, the strongest 4 week S&P500 period since 1933 suggests a little “back and filling.”
The biggest factor, however, is likely to be earnings. As I noted back in Q4 08, the analyst community remains way too optimistic about Q1 numbers, despite their horrific over-optimism throughout the debacle that was 2008.
And while it may be true (at least in part) that earnings weakness is already reflected in stock prices, its a whole lot truer at 6,500 than it is at 8,000.
Corporate profits will be suffering from a one two punch: Continued writedowns from bad investments, and a recessionary drop in sales that was fairly substantial.
David Gaffen of the WSJ writes:
“Analysts are expecting earnings will decline 37% from the year-ago period. All 10 groups in the S&P 500 show a year-over-year profit slide, a uniform decline that hasn’t happened in the 10 years Thomson Financial has been tracking such data.
The key to keeping the stock rally going won’t so much be whether first-quarter earnings meet or beat those expectations. Instead, the gains will be more dependent on what company executives say about the second, third and fourth quarters.”
37% is a pretty ugly number. But even worse, I disagree with that last statement. What corporate executive has the foggiest clue about Q3 or Q4? In fact, I don’t think they even have a clue about Q2.
In the current environment, plus Sarbanes Oxley, whoTF wants to go out on a limb to forecast future earnings? What corporate lawyer is going tio green light THAT?
Those who are long better hope this rally is dependent upon something else. As for my firm, we took quite a few chips off the table last week, moving from 75% long to 35% long.
The Barron’s Interview: A Leading Bear Turns Bullish, Sort of (December 7th, 2008)
Time to Brace for Trouble as Profits Debacle Starts
WSJ, APRIL 6, 2009