U.S. First Quarter 2012 Earnings Vs. International Headline Risk:
The U.S. major averages tested new ground lower last week (ended April 13, 2012) as investors and traders may have been focused on trends in Europe and China in the short-run. Bond yields rising in Spain and Italy as well as China’s GDP growth coming in less than expected at 8.1 percent eclipsed most other news headlines and the negative sentiment contributed to the S&P 500 closing below a key support level 1,370.
Volatility rose this week as trader sentiment flip flopped and the major U.S. averages had a consecutive worst week in the year 2012
Is the Long Term Rally Over?
Buyers stepped in early last week after the market was oversold and picked up financials as well as technology. The market is also providing buyers with opportunities again as stocks got pummeled on Friday. Traders who believe the longer term trend is upward won’t mind getting stocks at lower prices this week provided the correction doesn’t turn into a bear market.
Some sectors have already dipped briefly into bear market territory and we believe the negative wealth effect, slow jobs growth, problems in Europe along with China’s lowered GDP growth could impact the economic fundamentals negatively in the next few weeks. These concerns are medium run earnings news will be more important for short-run considerations. So far, the major stocks that have reported from tech to financials have beaten estimates which will make analysts have to revise P/E considerations that are already low compared to historical levels.
If earnings news overwhelms European – Asian headlines, we expect an upward bias in equity prices. If Europe news becomes too negative, expect more discussions of possible ways to alleviate the European debt crisis with international solutions proffered.