Heed The Yellow Flags
Stocks were poised for a higher open Friday, partly helped by better-than-expected earnings from Hewlett-Packard (NYSE: HPQ).
Earnings and sales growth declined from the year-ago quarter but still came in well above expectation. Fiscal first-quarter profit fell 11 percent from a year ago to $0.82, well above the Thomson Reuters consensus estimate of $0.71. Revenue fell six percent to $28.3 billion. Analysts expected $27.8 billion. It also raised its second-quarter earnings guidance to $0.80 to $0.82 a share. The current consensus estimate is $0.77.
It's nice to see some green early Friday after two days of sharp losses, but after two straight days of institutional selling in the major averages, investors have good reason to tread cautiously. This is not an environment to try to catch stocks on sale.
If you started buying high-quality names after the market confirmed a new uptrend on November 23, there's nothing wrong with taking partial or full profits here. And if recent new buys are struggling, protecting capital and keeping losses small is sound strategy.
Headed into Friday, the broad-based NYSE Composite Index showed six higher-volume declines and one day of stalling action on January 24. Selling has been less pronounced in the Nasdaq Composite and S&P 500. Each index shows three higher-volume declines and one day of stalling action. When higher-volume declines start to cluster in the indices, it can often presage more price weakness.
What's hard to believe is that after a 14 percent rally for the Nasdaq and S&P 500 since the mid-November lows, both indices have only pulled back two to three percent off recent highs. That's not much of a consolidation. A major support level for the NYSE Composite is its 50-day moving average around 8,698. The S&P 500's 50-day line is at 1,473. For the Nasdaq, it's 3,105. The risk for more downside is clearly there, especially with a slew of retail earnings reports on the horizon. I'd like to think that retail CEOs will be confident about overall business and consumer spending in 2013, but we could hear a different tune.
Nordstrom (NYSE: JWN) didn't get things off to a great start after the close Thursday. Shares fell two percent in after-hours trading after the upscale department store operator guided full-year earnings below expectations.
It's been tough watching solid gains evaporate over the last two sessions, but the market is in dire need of a consolidation phase -- not a full-blown correction but a modest pullback that will give stocks time to catch their breath.
Buy prospects are scant and extended stocks are a dime a dozen. A consolidation phase will change this and present new buying opportunities in due time.
For now, there's nothing wrong with watching from the sidelines and letting the selling run its course.
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