The current market action continues to be headline-driven, according to my stock analysis. Stocks moved lower on the initial banking concerns in Cyprus, but rallied after the Federal Reserve reaffirmed its program of low interest rates and monthly bond buying. Stocks then bounced on the Cyprus resolution.
This headline-driven market makes it difficult, based on my stock analysis. The fear is that the surfacing of major bad news could rock the stock market rally. The situation in Cyprus was relatively insignificant on its own, as the country’s gross domestic product (GDP) was a mere $25.0 billion in 2011, below that of Wyoming. However, the fear was that a banking failure in Cyprus would have created a confidence issue in the eurozone, based on my stock analysis. (Read “Markets Looking Higher, but Eurozone’s Looking More Dangerous: Which Will Win Out.”) My stock analysis suggests the eurozone continues to be in a financial crisis that could take years to resolve.
Over the next month, traders will turn their focus to the upcoming first-quarter earnings season. The weak results from bellwether shipping companyFedEx Corporation (NYSE/FDX) and farm equipment-seller Caterpillar Inc. (NYSE/CAT) will not help,as my stock analysis indicates. Both companies are viewed as barometers for the global economy, so their weakness flashed a red flag. We will see if there was any impact from the sequestration and fiscal cliff concerns in the first quarter, according to my stock analysis.
According to FactSet, first-quarter earnings are expected to contract by 0.7%, but growth is estimated to return to 10.3% in the third quarter and 15.6% for the fourth quarter; clearly, there are some optimistic estimates. So far, 84 S&P 500 companies have warned of lower-than-expected earnings, while 24 companies have provided positive guidance. The sectors issuing the worst forecasts include the materials, health care, consumer staples, and consumer discretionary sectors, so you may want to stay away from these areas.
And as we move toward the end of the first quarter, the S&P 500 and the Dow may be topping, as we near the end of the best six months of the year for returns, based on the Stock Trader’s Almanac. This is why you should take some profits.
My stock analysis indicates that traders are looking for reasons to take some profits, given the recent advance. Whether it’s Cyprus, earnings risk, or the sequestration, traders want to take some money off the table.
While I’m not convinced a rally is in the works, I feel stocks will hold as long as the news is positive. I still feel a correction is coming-I’m just not sure when or how significant it might be. However, I suggest you have some cash ready to buy on the market dips, based on my stock analysis.
Don’t focus too much on the headlines. Hang tight and wait. You also need to think about a viable investment strategy, including taking some profits off the table and the use of put options as a defensive hedge against weakness.