First-Quarter Earnings the Catalyst for Correction?

Tuesday, February 12th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential

No matter how you look at this stock market, the fact of the matter is that a lot of stocks are trading right at their all-time or 52-week highs on the back of mostly flat earnings. This makes it tough to be a buyer. In fact, I wouldn?t be a buyer in this market at all.

Sure, there are trades out there; there always are. And yes, stocks aren?t expensively priced, but that?s the point. They are fairly priced, because revenues and earnings growth are so modest. This is the time to reap, not sow new positions.

While I?m not one who roots for disaster, the best thing that could happen for long-term stock market investors is a major price correction this year. Unless gross domestic product (GDP) is plunging or there is some sort of external shock to the system, it would make for an attractive new entry point.

Right now, there is a little momentum in U.S., Chinese, and German economic news, and this is giving an otherwise trendless stock market some hope. I call this market ?trendless,? because I don?t like the trading action, and there seems to be a high amount of collective uncertainty. Investors aren?t piling into the stock market, because there?s no reason to with little earnings growth. Even though there?s no other asset class with the potential to beat the rate of inflation, there is little enthusiasm for stocks at their highs.

You can?t really ignore the stock market going forward, but you can attribute less attention to the main stock market indices. Good businesses are going to trade with less correlation to the broader market; that?s why we need a major correction, so new buyers can have a better entry point.

Corporate earnings were pretty mediocre in the fourth quarter, but balance sheets continue to be excellent. So the potential for acceleration in earnings is definitely there; all we need is a boost to the top-line.

If you pay attention to stock market indices, the one to watch is the Dow Jones Transportation Index (or Average). In December of last year, transportation stocks led the breakout and accelerated strongly through the entire month of January. Wherever this index goes, the rest of the stock market will follow. (See ?Large-Caps Shine as Dow Jones Industrial Average Toys with All-time High.?)

And with its strength, the industrial economy is signaling that it?s doing better. Countless, but not all, industrial companies reported good earnings in the fourth quarter, and my unscientific read is that much of the earnings growth was stronger in these industrials than in the other market sectors, even technology.

Current stock market action is choppy, but the January strength is meaningful. Near term, this market has more upside. First-quarter earnings season is the key. If revenues and earnings don?t show a meaningful acceleration in the first quarter, this will be the catalyst for correction.

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Source: http://www.profitconfidential.com/stock-market/first-quarter-earnings-the-catalyst-for-correction/

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