Bad News Keeps On Coming
The major averages remain in a trading range, with bargain-hunting countering a generally dismal earnings season. Near-term trading is likely to be choppy, and a breakdown below 7,552.29 in the Dow Industrials would reconfirm the bearish primary trend. To accommodate some rank changes, our cash position is being increased to a range of 30% to 40%.
Despite some isolated bright spots, December-quarter results have provided few reasons for cheer. Earnings for the S&P 500 Index are on track to be down 25% to 30% from year-earlier levels, and guidance for 2009 has been discouraging. According to Zacks Investment Research, downward profit-estimate revisions outnumbered positive revisions by a ratio of more than five-to-one in January.
Except for health care, all sectors of the S&P 500 have declined over the past month. Declines outside the economically sensitive financial, basic materials, and industrial sectors were relatively modest until recently, but several poor earnings reports have triggered a recent slide in the consumer staples and consumer discretionary sectors.
With even supposedly safe stocks getting mauled, and news on the economy unremittingly bad, sentiment toward stocks is understandably bearish. Bearish newsletters again outnumber bullish newsletters, according to Investors Intelligence. Equity mutual funds suffered net outflows for six straight months before rebounding modestly in the first few weeks of January.
In fact, the widespread bearishness seems to be among the few glimmers of hope for equity investors; with sentiment so pessimistic, even a little good news could go a long way. Two other potential reasons for encouragement also deserve mention:
• After widespread cuts in analysts’ estimates, consensus projections now seem more realistic. According to researchers at J.P. Morgan, consensus estimates now predict only one in three companies will post profit gains through the September quarter. Revenue is expected to fall by more than 10% in the next three quarters, and profit margins are expected to contract.
• Despite all the bad news on earnings, the banks, and the economy, the Dow Industrials have not confirmed the Dow Transports’ recent breakdown below the November lows. The longer the Industrials avoid a close below 7,552.29, the more significant this nonconfirmation will become.
Holding 30% to 40% of equity portfolios in short-term reserves seems prudent. For new buying, emphasize stocks capable of swimming upstream, such as Biogen Idec ($52; BIIB).