There Is Reason for Caution
After running straight up during the first quarter of 2012, the market has been struggling for two weeks. The pullback has been shallow so far, but the big question this week is whether earnings season will be the catalyst for further downside.
Market players have grown rather sanguine about the possibility of downside because the endless liquidity provided by quantitative easing has consistently bailed us out and helped to produce amazingly lopsided action to the upside. Every time it looks like we may be due for a deeper correction, just a hint of the possibility of quantitative easing saves us. We saw a good example this Thursday, when the weekly unemployment claims were below expectations, which quickly caused talk that QE3 would be forthcoming.
Despite the hopes of the bulls for endless money-printing, Federal Reserve members have been quite clear that quantitative easing is on hold for now. They aren't ruling out its use completely, but it will take some economic weakness before it becomes a reality.
And that brings us to the matter at hand: Can the market find its footing and regain momentum without the magic of the Fed to drive it?
There are two issues to consider. First, Europe is starting to show cracks again with Spain being the major concern. The election in France is being watched carefully but, unsurprisingly, the bailout of Greece doesn't seem to have fixed the sovereign debt issues that are plaguing the continent.
The second issue we are confronting this week is earnings reports. The reactions to reports from Google(GOOG) and Bank of America (BAC) were not very upbeat Friday, although most analysts consider the numbers to be on the positive side. Market players were in a "sell the news" mood, and we have to watch careful for that theme to consider.
This week we have hundreds of reports, with the most important probably being Intel(INTC) , IBM(IBM) and Microsoft(MSFT) . INTC is often a bellwether, and the reaction to that report will tell us quite a bit about the health of the market.
The bottom line is that the market has suffered technical damage and is struggling to regain its footing and turn back up. We have some potential catalyst that could easily result in more selling pressure so caution is warranted.
The fact that Apple(AAPL) is finally struggling after leading this market for so long is a clear indication that the character of the action has been shifting. Small-caps have already pulled back substantially and leadership is narrowing.
There is reason for caution. We'll stay watchful and see how things develop, but the bears deserve the benefit of the doubt. Earnings, however, will be the excuse that is used for whatever way we move next.