Sales & Earnings Dry Up…As Predicted

The S&P500 finished the week up slightly, but the big market story was the meltdown suffered on Friday, with the S&P losing over 24 points, making it the single biggest drop since June. Volume jumped, which unfortunately for bulls is a negative sign–rising volume on big down days means that stock owners were rushing for the exits. And volatility also spiked, rising over 13%. The good news is that the VIX is still in historically calm waters, well under 20. The bad news is that the VIX has a long way to go (up) before entering an overbought area, and one that is usually associated with market bottoms.

US macro news is still in the doldrums. The Empire State Manufacturing survey missed badly. And while retail sales beat expectations, more folks are simply not saving (or worse, draining savings) to keep up their purchases. Consumer prices were higher than predicted. Initial jobless claims roared back close the dreaded 400,000 level. The Philly Fed survey beat expectations, but its two most important sub-components, employment and new orders, both disappointed.

Technically, the S&P seems to be entering a downtrend on the daily charts. In terms of breadth, new highs minus new lows is dropping fast. And the percent of stocks above the 50 and 150 day moving averages seems to be breaking lower. It seems that some more selling, at least from a daily perspective, is very possible.

Back on June 23, we warned that corporate earnings could start to break down. Back then, a few key firms—P&G, Texas Instruments, Ryder Systems, Adobe and Starbucks—began to warn of lower profits. We also noted that the only way stock prices would keep going up is if P/E ratios would start to rise. Well, that’s exactly what happened—P/E ratios did rise over the summer, and stock prices went up with them.

But now, the story with corporate sales and profits is getting scarier. Not only are sales and profits falling further, but more importantly a much broader swath of firms are beginning to suffer. Technology firms have been especially hard hit. Market leaders such as Microsoft, Google, IBM and Oracle have been missing Q3 estimates badly, AND have been guiding much lower for Q4 earnings.

This is setting up an especially risky scenario. Just as in 2008, when the first three quarters were disappointing, most market “experts” were hoping for a huge rebound in Q4 earnings to rescue the year, the same is happening in 2012. And now there’s a greater danger that these hoped for Q4 earnings in 2012 will not materialize.

On top of that, the market impact of the “fiscal cliff” will be hitting in mid-November, just after the elections. This means that the markets could be kicked when they’re already down because of poor sales and earnings.

Yet somehow, equity prices are still hovering near multi-year highs. Why? Once again, because brainwashed investors and traders firmly believe that no matter how bad the fundamental news, then Fed will make everything good.

We will soon find out if this is true.


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