S&P 500 up Against a Wall Following Slight Breakdown

Wall Following Slight BreakdownThe S&P 500 is up against a bit of a wall and has to convincingly break 1,465 again, which it achieved in mid-September, in order to accelerate. A lot of corporate earnings have been decent, but quite a few are reporting light visibility for the fourth quarter, and this is no surprise. The stock market peaked mid-September when the mini-rally, driven by a third round of quantitative easing (QE3), consolidated; it has now recovered. We’ve seen large, international companies report earnings or visibility below consensus due to very slow business conditions in the eurozone. Despite the S&P 500’s fair valuation, I think it’s going to be quite difficult for the main stock market averages to accelerate much further.

While Johnson & Johnson’s (NYSE/JNJ) earnings were good and the company’s share price helped the Dow Jones Industrials, earnings results for International Business Machines Corporation (NYSE/IBM) had the opposite effect. This former stock market leader broke down significantly, as you can see in the stock chart for International Business Machines (IBM) below:

 International Business Machines Chart

Chart courtesy of www.StockCharts.com


Expectations were already lowered for third-quarter earnings season. My reading of current corporate results is that blue chip companies are now running out of cost-cutting options to keep their earnings afloat. The likelihood of corporations being able to accelerate their earnings going into 2013 is very low, considering business conditions in the eurozone and declining economic growth in China, which is now the world’s second-largest economy.

The “AGA” stocks, which include Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN), have all retreated from their recent 52-week highs. Amazon.com recently hit $264.00 a share; now it’s at $247.00. Apple recently hit a record $705.00 a share and has now broken $640.00 a share. (See “Warning—Apple’s Share Price a Major Red Flag.”) If the stock market’s recent momentum has slowed, technology stocks are showing it. Apple’s chart is below:

 Apple Inc Chart

Chart courtesy of www.StockCharts.com

I repeat my view that, generally speaking, I would not be considering new positions in this stock market, particularly among most large-cap companies. Third-quarter earnings so far reveal that corporations are “hanging on,” but revenue growth is proving elusive; in a sense, it cannot improve until we get a major turnaround in economic activity among the world’s biggest economies.

The stock market looks tired, in my view, and the S&P 500 index has been going up quite consistently since June. Only recently has it shown a slight breakdown, and I suspect we’ll be in for more downside in the near future.