Stock Market Vulnerability Showing as We Near 1Q15 Reporting Season

Stock MarketThe stock market action on Wednesday indicates the high anxiety amongst investors, traders, and institutional money, suggesting it may be vulnerable to some near-term selling.

Stock Market Vulnerable to the Downside

Despite recent record advances by the DOW and the S&P 500, along with the rumors of more gains to come, there was always a sense that the stock market was vulnerable to the downside. The markets seemed to have pushed aside the overhanging uncertainties domestically and in the global economy to instead focus on the Federal Reserve and interest rates.

There was talk of higher stock market advances with the fresh bond buying from the European Central Bank (ECB) and the continued easy money in Japan and China. Yet the stock market seems to care very little about the fact that gross domestic product (GDP) growth will slow to seven percent in China this year, which in reality, will probably come in below seven percent.

Despite trillions being pumped into the global economy and stock markets, we are still not yet seeing the kind of economic renewal one would expect from this kind of easy money climate.

Next Step for Stock Investors?

As a participant in the stock market, now is not the time to lower your guard. In fact, right now, you should be even more prudent when evaluating the stock market and your next steps.

On the charts, the blue-chip DOW has declined in five of the past six sessions to below the stubborn 18,000 level on Wednesday and back to negative for the year. My major concern with the index is the risk associated with the multinationals.

The fact that the dollar has been strengthening against a basket of world currencies, especially the euro, makes me nervous going forward. The strong dollar makes American goods more expensive; this will likely cut the demand for exports and revenues reported by these multinational companies. We will likely see an impact in the first-quarter reporting season, which is just around the corner; but it could be a mess beginning in the second quarter, especially if the greenback remains near parity. I would be looking at dumping some of my multinationals or seeking out protection using put options.

Dow Jones Industrial Average Index

Chart courtesy of

The biggest selling in the stock market is focused on the higher-beta technology and small-caps, with the NASDAQ and Russell 2000 reaching lower. The NASDAQ was down nearly 100 points to just above 4,900. Just a few days ago, the index was at 5,040.

NASDAQ composite index

Chart courtesy of

The risk is when the stock market turns downward; higher-beta stocks will get punished at a greater pace than the broader market. This is especially true with the high-momentum technology and Internet stocks that are trading at extreme valuations.

Finally, don’t look to the first-quarter earnings season for help. FactSet is estimating earnings to contract year-over-year on muted revenue growth. For the time being, hang on and wait it out, as I expect added volatility to surface during the reporting season.