GOOG’s ill timed oops in the early afternoon dumped the S&P 500 approximately 12 handles from what been shaping up previously as a fourth straight “checkmark” session. The technology behemoth provided another example of a non-financial firm’s missing earnings expectations by a country mile such that companies in aggregate have fallen short of bottom line and revenue estimates for the quarter when factoring out the figures from big banks. With large broker-dealer announcements mostly in the rearview mirror, the prospects for the rest of the reporting season appear dim.
Despite the shocking nature of the disappointment, the TICK never registered a print worse than –925 in the immediate wake of the surprise headline, a highly unusual phenomenon given the aggressiveness of the downward move.
Here is a chart showing an adjusted TRIN vs the S&P futures - no broad-based selling pressure as the index fell and recovered...
This suggests large institutions stayed with their VWAP buy programs (as in the chart below) out of confusion or necessity.
I can envision only two scenarios for such adherence to purchasing in the face of clear extremely negative news on, what was at the time, the third biggest stock in America.
First, in anticipation of this morning’s expiry, the baskets could have reflected a desire to add to share positions to the balance sheet and/or to protect the very important 1450 strike price for the S&P 500. Furthermore, the buying could have arisen simply from the need to put money to work especially in light of the standard October fiscal year end window dressing for many mutual funds. Regardless of the reason, both of these impetuses are transient as the momentum may tail off as early as today with the arrival of the “double witch.” This puts equities in a very tenuous state especially considering the huge increase in open interest for the futures after Wednesday’s third consecutive session of solid gains hinting that managers are still trying to expand their portfolio beta.
The economic data continues to improve aggressively with the Philly Fed easily outdistancing consensus despite its two most important components, Employment and New Orders, ticking down sequentially. Some bulls were encouraged by the 1% increase in Leading Indicators versus the August numbers; however, the data series historically has offered nothing of predictive value, save that of a contrarian indicator. For example, the previous instance of such a leap occurred arrived three days ahead of the April, 2010 top that spawned a 17% selloff for the blue chip index. Although the survey did increase with similar magnitude in April, 2009, it produced several encouraging readings near the apex of both the Dot Com bubble and financial crisis.
Regardless of how I spin these numbers, I am forced to concede that the recovery has appeared to accelerate in September. This optimism conflicts with what corporations are saying via their earnings releases, preannouncements, and conference calls. I had argued through the fall of 2011 that in the case of such a divergence, I always will defer to what companies have projected as opposed to the typically stale figures the government has released. Thus, I subsequently remained steadfastly bullish at the time. This dynamic currently has flipped such that I do not expect a trough in earnings growth, but rather a peak in economic strength. Overseas weakness, fiscal uncertainty, and a central bank that has fired its last bullet by signaling the launch of the QE3 only gives me comfort for this thesis.
Other warning signs remain intact as the small caps continue to lag as the Russell 2000 underperformed the S&P 500 again yesterday despite the heavy weighting of GOOG and AAPL for the latter. The average intraday range for the blue chip index continues to calculate to approximately 12 handles, a dangerously skittish level that consistently has led to significant pullbacks*** as many managers step aside during selloffs for fear of taking heavy losses soon after entering or adding to a position. Finally, as we inch closer to the Election in the face of a tight race, the probability of an exogenous negative shock on November 6 and in the intermediate aftermath rises daily. Moreover, with Congress scheduled to go on vacation on December 14, the window available to solve the fiscal cliff will shut quickly in the wake of a bitter campaign season.