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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • Coming Week Market Movers: 4 Reasons To Be Bearish 0 comments
    Apr 8, 2012 5:39 AM | about stocks: AA, SPY, UDN, UUP, FXE

    Coming Week Market Movers

    The following is Part 2 of our weekly review and preview strategy guide for traders and investors of all major asset classes via both traditional instruments and binary options, covering coming week's market movers and trade ramifications

    As we noted last week, the EU crisis is showing signs that it may again pressure markets on rising concerns about Spain, Italy, and Portugal. Sure enough, the EU again moved to the forefront of investor concerns last week.

    Yet in the coming weeks, US Q1 earnings season may actually be the bigger market mover.

    As we'll discuss below, there are 4 big likely market drivers, all distinctly bearish.

    Indeed, the most bullish factor over the coming week may be if markets ironically react to the bad news as good news because it raises hopes for new central bank stimulus.

    So let's dig right in.

    1. Signs of Trouble For Q1 Earnings Season

    Global stock indexes have just finished one of their best quarters in years, with the bellwether S&P 500 up about 16% thus far, despite slowing growth in most of the world and the ongoing EU debt crisis. However the party may soon come to an end.

    First quarter 2012 earnings season, which begins in just a few weeks, is shaping up to be the worst since the financial crisis.

    Projections for first-quarter earnings growth are running as low as 0.5 percent, according to Standard & Poor's/Capital IQ. And that's after a mediocre fourth quarter from 2011, indicating that the days of big earnings improvements that followed the depths of the 2008 financial crisis are over.

    The level of negative preannouncements at their highest level since the March 2009 market lows, as companies try to lower expectations and avoid the kind of negative surprises that can spark selloffs.

    YET HOPE REMAINS

    However it's uncertain what that will mean to the stock market and its bull run that began in October.

    After all, stocks have powered higher before without the benefit of strong earnings to back them up. There are many analysts who believe the same thing could happen this time. There are real reasons for their bullishness.

    • Some justify this belief by pointing to how much better yields are from stocks versus those of investment grade bonds.
    • Others point to the enormous amounts of cash sitting on the side, waiting for fears about Europe or China to subside.
    • Others note that the overall weak performance of most major economies suggests more stimulus programs coming. In recent years, new stimulus programs have consistently sent risk asset markets higher despite ongoing deterioration in Europe and in global growth. Note how markets have at time moved higher on poor US or Chinese data, because that raised expectations for new stimulus from the Fed and PBOC. The Fed clearly believes more such programs may be needed.
    • And for the real cynics, there is the assumption that analysts could lower expectations yet again in order to make it easier for companies they cover to beat forecasts.
    • US rail traffic continues to show impressive numbers, with building materials like metal and stone leading the way, suggesting ongoing improvement in construction and thus the general economy.
    HOWEVER, RISK ASSETS DUE FOR A CORRECTION - WEAK EARNINGS MAY BE THE CATALYST

    With the bellwether S&P 500 up 28 percent in five months, after having come so far so fast, it's vulnerable to a selloff from any major disappointment.

    The stage for a disappointment from earnings is certainly set. While 63 percent of S&P 500 companies beat earnings estimates in Q4 of 2011, those beats were mostly due to lowered expectations. Moreover, if we subtract the contribution from Apple and Caterpillar's stellar earnings, the aggregate rate of companies beating expectations was about 55%. Not so encouraging.

    In this upcoming period (earnings season officially starts April 10 when Alcoa (NYSE:AA) reports.

    Many analysts believe that most of the 10 S&P 500 sectors are likely to see earnings overall earnings declines.

    Not surprisingly then, with markets at multi-year highs, many could be tempted to take profits.

    If the tone of earnings seasons turns bearish, and that trickle of selling could turn into a flood if the tone of the first three weeks is disappointing.

    2. Delayed Reaction to Poor US Jobs Report

    The US jobs report Friday posted missed expectations by 41%, for its worst performance since early 2009, with only 120k non-farms jobs added vs. 205k expected, a nasty 41% miss. Most markets were closed for the Easter holidays, so most of the reaction will felt early this week. While the unemployment declined from 8.3% to 8.2%, that seemingly bullish figure is being discounted as the result of discouraged workers leaving the workforce rather than any genuine decrease in unemployment.

    WHAT DOES IT MEAN?

    Forex: The USD is likely to suffer because bad US jobs reports hit the USD with a double whammy: lower rate hike hopes and higher expectations for more stimulus, both bad for the USD. The best hope for USD bulls is for more trouble in the EU that sends traders back into the relatively safer USD. Risk currencies should also suffer from the news. The big near term beneficiaries should be the other safe havens, and the EUR, simply because a declining USD tends to help the EUR.

    The impact on equities is harder to call. While the news is clearly risk off and so should be bearish for stocks, if markets believe that the chances for new stimulus from the Fed are now significantly higher, then we could again see equities up on otherwise negative news. We've seen this "bad news is good news" kind of reaction before in recent weeks.

    3. EU Crisis Related News

    With markets increasingly nervous about Spain and Portugal, further bond auction results and related news (such as the poor Spain bond auction last week from any of the GIIPS) could easily move markets.

    4. Risk Asset Markets Remain Near Multi-Year Highs

    That simple technical fact makes investors more prone to take profits if there's any sign of trouble, and thus may amplify the negative reaction from the other big three bearish market movers noted above.

    Other Likely Market Movers From Calendar Events

    Looking at the week's economic calendar, here are the most important events to watch. It's a relatively light week for economic events, but unusually packed with data from the world's top growth engine, China.

    Monday

    • Europe: Most European markets are closed for the Easter holiday, suggesting very quiet trading.
    • China: Reaction to a batch of data released Sunday night GMT. It's mostly second tier data, but also includes an important report on new loans that offers insight into monetary policy. Also CPI, PPI reports; if these show inflation quiet, that raises the chances of more stimulus and easy money from the PBOC.

    Tuesday

    • China: trade balance
    • Japan: BoJ monetary policy and monthly interest rate statement and press conference may offer clues helpful for those trading JPY pairs.
    • All: G7 Meeting- Given the recent contagion fears about Spain and Portugal, this meeting may offer some guidance about whether the EZ's leadership has plans for new action.

    Thursday

    • Australia: March jobs reports - unemployment rate, employment change

    Friday

    • China: Another batch of data, including real Q1 GDP, retail sales
    • US: CPI, UoM Consumer confidence
    Lessons and Ramifications

    The prior week brought the most significant drop of 2012 in the bellwether S&P 500, primarily from hawkish comments from the FOMC March meeting minutes Tuesday and poor Spain bond auctions later last week.

    As noted above, this week's market movers have a distinctly bearish tone. Delayed reaction to the poor US jobs reports, anticipation of lukewarm US earnings, and fears of more trouble from the EU all provide an excuse for further profit taking in stocks and other risk assets.

    Perhaps the most bullish question is, will the markets react to the bad news as good news because it raises hopes for new stimulus?

    SELLING LIFEBOATS ON THE TITANIC

    Central bank policy remains arguably the single biggest short term market driver in most major economies and for most major currencies. Virtually every major central bank is trying to inflate away its debt problems via historically low rates and continued stimulus programs that threaten the value of their currencies and anything denominated in them, including your assets. We all need currency diversification just as we need asset and sector diversification. However traditional currency trading doesn't work for most investors. The best help I can offer you is THE SENSIBLE GUIDE TO FOREX, SAFER, SMARTER WAYS to SURVIVE and PROSPER from the Start. It's the first book to show how both prudent active traders and long term investors with limited time and risk tolerance can tap forex markets to hedge currency risk and improve returns. See my profile page or the above link for details. Call this naked promotion, but I feel like the guy selling lifeboat reservations on the Titanic.

    DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING DECISIONS LIES SOLELY WITH THE READER. IF WE REALLY KNEW WHAT WOULD HAPPEN, WE WOULDN'T BE TELLING YOU FOR FREE, NOW WOULD WE?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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