Momentum Stocks or a Momentum Market? - Ahead of Wall Street

Tuesday, April 8, 2014

Stocks are expected to start today's session on the weak side, but the negative momentum from the preceding two sessions may not fully carry through given the essentially empty docket.

There is nothing on the economic calendar and the day's earnings announcement from Alcoa AA wouldn't arrive till after the regular trading session. The Q1 earnings season doesn't get into high gear till next week, though we do have J.P. Morgan JPM and Wells Fargo WFC reporting results at the end of the week.  

Stocks have been down just a couple of sessions and the broader indexes aren't that far from record levels. But there is palpable anxiety all around, even though most traders are trying to reassure themselves that is nothing more than a modest pullback that will reverse soon enough. The popular narrative in the financial media is overly focused on the so-called momentum stocks in the biotech and tech sectors and how the loss of mojo in those stocks is starting to bleed into the broader market.

I don't subscribe to that explanation as I all along saw the entire market in some sort of a momentum uptrend. I have been, and still remain, unconvinced of the market's strong run last year as I didn't see enough fundamental support for those gains. The most important fundamental support for stocks is earnings and the earnings picture lately has been inconsistent with a market in record territory.

Markets are forward-looking, with current prices reflecting future expectations. Not much is expected from the Q1 earnings season that Alcoa will (unofficially) kick-off this afternoon, with total earnings expected to have declined from the year-earlier level. But expectations for the coming quarters remain elevated, with growth expected to resume in Q2 and ramp-up from the second half onwards.

For those expectations to hold and provide support to this market, we need companies to reverse course and start giving out reassuring guidance. The estimate revisions trend has overwhelmingly been negative for almost two years now, but the momentum market shrugged that key fundamental negative in hopes of a future turnaround. Less than favorable guidance on the coming Q1 earnings calls will cause estimates for Q2 and beyond to start coming down in the next few weeks.

I find it hard to justify stocks to be going up when earnings estimates are coming down. Let's see what's in store for us this earnings season.

Sheraz Mian
Director of Research