The much-anticipated pullback is finally under way, some investors say, after a mid-week wobble. However, the market is showing it still has some juice left — if earnings can meet towering expectations.
This earnings season, if you’re good, you’re just OK. If you’re just OK, you’re bad. And if you’re bad, you’re quickly taken outside and put out of your misery. Only the truly great are lauded — and even then not very much.
In an environment like that, and with a heavily extended market, disappointments are taken hard. The S&P 500 just ended its first down week in eight with underwhelming results from the likes of Goldman Sachs and Freeport McMoRan Copper & Gold weighing on indices.
Some big energy companies such as Chevron Corp and ConocoPhillips are reporting results next week. Expectations have been running up in the -sector, the third -largest in the S&P 500, providing plenty of room for disappointment.
“We have been climbing up a mountain [and] there is definitely a bit of a pause as people are going to need some evidence of accelerated recovery — not just baseline recovery,” said Rick Meckler, president of investment firm LibertyView Capital Management, in New York.
Analysts have beefed up expectations as stocks rocketed late last year on signs of an improving economy. S&P 500 earnings estimates for the current quarter were revised up 1 percent over the last 60 days, according to data from StarMine.
Positive revisions were heavily concentrated in the technology, energy and materials sectors. Estimates in the materials sector were raised 5.7 percent; in energy, they rose 4.8 percent, and in technology, 2.3 percent, StarMine said.
Unsurprisingly, those three sectors, along with financials, took the brunt of selling during the week. An S&P index of materials shares fell the most, losing 3.3 percent over the week.
On top of that, big-gaining “mo-mo” momentum stocks like F5 Networks, Salesforce.com, Netflix Inc and Riverbed Technology, are looking shaky after F5 Networks missed revenue estimates and forecast a weak second quarter. Its shares tumbled more than 20 percent.
Wall Street will also note the statement on Wednesday -afternoon from the Federal Open Market Committee, which some economists believe may give a slight nod to signs of improvement in the US economy, especially among consumers and factories. Economic data in the coming week includes consumer confidence, durable goods orders, a first look at this month’s consumer sentiment from the Thomson Reuters/University of Michigan surveys, and the first look at fourth-quarter GDP.
CMarc Pado, US market -strategist at Cantor Fitzgerald & Co in San Francisco, said declines in leading sectors are a clear sign of profit taking. He is calling what he terms “a healthy pullback” through the historically weak month of February.
“We’re looking for a 5 percent to 7 percent pullback range, and I think we started it” on Wednesday, he said.
A pullback of that magnitude would take the S&P 500 down to about 1,204, based on Tuesday’s closing price. That is still within its uptrend channel from the March 2009 lows, which many technical analysts see as strong support for the market.
Most investors agree that stocks are overbought by most measures.
Although the recent losses have helped cool the S&P 500’s short-term relative strength index, a measure that compares opening and closing highs, on a longer-term weekly basis, the benchmark index is still overbought.
With just six trading days left this month, the S&P 500 is up 2.04 percent for the month.
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