MLR - Premarket Pulse October 24, 2012

Published : October 24 2012 at 9:24 ET

The NASDAQ Composite and Russell 2000 both bounced off their respective 200-day moving averages on Tuesday, the NASDAQ on heavier volume and the Russell 2000 on lighter volume. The NASDAQ Composite closed mid-range, a rather weak showing for an "oversold" bounce after a selloff over the prior weeks which took the NASDAQ down -6% from its peak. The Russell 2000 closed at the top of its range but was still lower on the day. The S&P 500 closed in the lower half of its range on heavier volume as well, but remains below its 50-day moving average.

Much of yesterday's market weakness was caused by super-cap stocks releasing disappointing earnings reports with chemical maker DuPont (DD) gapping down after saying it would cut 1,500 employees and reporting a quarterly profit below estimates. 3M Co. (MMM) was hit for a 3.5% decline after the diversified ops concern reported a 6.7% profit gain in the third quarter, but reduced full-year guidance, and United Technologies Corp. (UTX) pointed to soft demand from airlines in narrowing its sales outlook for 2012. Over the past week, International Business Machines Corp. (IBM) , shipper FedEx Corp. (FDX), Google Inc. (GOOG), General Electric Inc. (GE) and fast-food chain McDonald’s Corp. (MCD) all disappointed on earnings and took some decent price dumps as a result.

57% of S&P 500 companies that have reported so far this earnings season have delivered earnings above views, but only 37% of firms have reported sales above analysts' expectations. According to Thomas Reuters, typically 62% of the S&P 500 companies exceed profit AND sales expectations. This underscores the weakness of this quarter's earnings season.

Adding to the selling pressure, over in Europe, ratings agency Moody's Investors Service downgraded five Spanish regions as Spain's gross domestic product contracted for the fifth straight quarter.

The Federal Open Market Committee began its two-day monetary-policy meeting on Tuesday, with a statement due for release today. Nothing new is expected, but the more important issue may be where Fed policy is at several months from now. With Governor Romney surging in the polls, the market may view "QEternity" as having a limited lifespan. And, as we have discussed in prior missives, we would ask the question as to why the market only rallied one day after the Fed announced "QEternity" before rolling over, when such a wide and sustained opening of the QE spigot might normally be expected to spark a sustained rally. Is "QEternity" the final QE bid to sell into? That is unknowable with certainty, but what we do know for certain is that this market remains in a downtrend until further notice, and investors should not be deployiing capital on the long side of this market with the idea of a sustainable upside trend suddenly appearing - wait for the evidence of a market turn to appear first.

On the short side, we have discussed (PCLN) as a target above the $600 level, and the stock has dropped to test the August low at 553.42 price level without undercutting it as of yet. This low would be our first downside price target for a PCLN short position, and yesterday it got down to 553.97 before bouncing. Baidu (BIDU) is holding up going into earnings tomorrow, and we would not seek to be short the stock into earnings, preferring to wait for the dust to settle following its earnings announcement. Tibco Software (TIBX), remains below our stop-out point at 27.64 as it closed at 26.48 yesterday, and near-term our downside profit objective is the 25 low of early June. As more leaders begin to break down, the short side of this market is still in the nascent stages, and if the market progresses into a full-blown bear then we would expect that more set-ups will show up in coming weeks.

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