Earnings Not Good Enough – Stock Market Leaders Breaking Their Moving Averages

dollar with calculatorA lot of leading stocks, mostly in the technology sector, are now breaking their 50-day moving averages (MAs); while they did so in May and then recovered, it was only the rally driven by the third round of quantitative easing (QE3) that saved them. The technical picture of the stock market is not looking good and neither is the outlook for earnings.

Caterpillar Inc. (NYSE/CAT) is emblematic of the way many large-cap companies reported this earnings season. The company reported okay earnings in the third quarter, but reduced its outlook for the future. While management cited that they don’t expect a recession next year, business conditions are slowing. It’s the continuing story on revenues; top-line growth is becoming very difficult to produce. Caterpillar’s stock chart is below:

caterpillar inc

Chart courtesy of www.StockCharts.com


A key indicator for the stock market this week will be earnings from Amazon.com, Inc. (NASDAQ/AMZN). The company reports this week, and the stock recently crossed its 50-day simple MA two weeks ago. Any earnings miss or revenue warning from Amazon.com would be very bad for the broader stock market and would also represent deterioration in consumer spending. Apple Inc. (NASDAQ/AAPL) also reports this week, so it’s going to be interesting. Amazon.com’s stock chart is below:

amazon inc stock chart

Chart courtesy of www.StockCharts.com

The Federal Reserve has been so accommodative and willing to do anything to please Wall Street and the stock market that I wouldn’t be surprised at all if it implemented on further monetary stimulus before the year is out—anything to keep the system inflated. However, at the end of the day, it won’t work—this business cycle is still playing itself out, and no policy action can jump-start revenue and earnings growth with most of the world experiencing a sovereign debt crisis. (See “This Is the Correction We Didn’t Get After QE3 Became Real.”) Corporations have the cash to jump-start the U.S. economy; but realistically, they are more likely to spend their cash hoards on share buybacks and dividend increases, because it’s easier and it’s what shareholders want.

The Dow Jones Transportation Index recovered a little bit over the last few weeks, but it is still trading in a tight range that has been in decline all year. My view is that stock market investors should not be buying. I’m not bearish going into 2013, but realistically, corporate earnings aren’t good enough to be the catalyst for a rising stock market. This is a market that is breaking down, obviously.