Rancid Earnings from Big U.S. Banks
The market actually, finally, dropped yesterday. The indices were on a nice streak of gains over the past couple of weeks. And all indices needed to pullback and take a break; yesterday they did. And today they may do the same.
The headlines are not great today; in fact they are horrendous. Headline numbers suggest that Bank of America (NYSE: BAC) missed earnings estimates badly, and reported an awful quarter. Yesterday tech behemoth IBM (NYSE: IBM) came in light on sales. And if U.S. earnings were not bad enough, China missed GDP estimates and reported 9.1% instead of 9.3% growth expected.
The China news yesterday literally crushed Asia. The indices in Asia last night, which already had bearish momentum after the U.S. decline, plummeted. The Chinese indices were smashed the worst and finished over 4% down on the session. The indices in Europe fell too, but losses are minimal and could easily turn positive for the session.
Despite all of the bearish sentiment, the U.S. indices are not phased. While they opened lower this morning, the decline does look likely to be intense. The lack of forceful selling, despite underwhelming earnings and economic data, indicates that investors are more concerned with the policy decisions in Europe than they are with today's financial data.
Unfortunately, the situation in Europe is a double edge sword. Sure, the possibility of a specific plan to increase liquidity, avoid default and recapitalize banks helps support the market as it dangles in front of investors for the next few days. But at some point, the EU must deliver, or risk very heavy consequences.
The possible plan lifted the indices 15% in 10 days, and that same plan has also dampened the heavy blows caused by bad earnings from Alcoa (NYSE: AA), Citigroup (NYSE: C), Goldman (NYSE: GS), BAC, JPMorgan (NYSE: JPM), IBM, and Halliburton (NYSE: HAL).
If Europe disappoints, not only will the bears retrace the entire rally from October 4, the added bad U.S. earnings, thus far, suggest the market would make another new low.
Today, we should focus on PPI data this morning and Apple (Nasdaq: AAPL) earnings after the closing bell. During the day, monitor SPX support at 1197. The bulls protected it yesterday, but it's possible, and still healthy, if the bulls lose it. But 1175 must be defended with force for SPX to able to make it back to its 2011 highs. The bulls can't lose that support zone again.
I don't advocate heavy exposure here. My friends and my subscribers have barraged me with emails asking for new trades. But given that the bulls have all the momentum right now, yet all that momentum could evaporate if Europe doesn't come through, makes it difficult to trade with a strong bias and trading with allocation weighted too heavily in a single direction is too risky.
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