Monday Market Movement – A Little Perspective Does Wonders

We're crashing! Just look at this chart, from "Chart of the Day [9]":

See – over there at the right, on top, at the end – do you see it? We're totally crashing. It's all over and it's OBAMA's FAULT!

That's what I learned this weekend from the Financial Media. While we failed to break out over the top of the uptrending channel dating back to early 2009, I still think all the doom and gloom forecasts are largely noise.

Yes, we may drop back to 1,200 on the S&P because that's the range we are currently in. But there won't be any reason to worry unless we fall MORE THAN 20%. The trick is to be prepared for the possible drop and to be ready to do a little bottom-fishing while everyone else is losing their heads.

If, on the other hand, the S&P bounces off of 1,400 or even our Must Hold line at 1,360 – then we still have the possibility of breaking UP – out of that long-term channel and back over 1,500 – maybe even to 1,600.

As you can see from the chart on the left, Corporate Profits as a percentage of GDP are taking a dip this quarter, but HAVE SOME PERSPECTIVE – they have never been stronger – EVER. The weakest thing now is confidence, and that's no surprise given this incredibly depressing election season.

People look at this chart and think the dip that occurred in 2008 can happen again but that was a fairly unique situation, mainly of massive writedowns in real estate holdings and bank earnings. Companies like AIG and FRE and FNM lost hundreds of Billions and that dragged down overall Corporate Profits but that doesn't make it "normal." We have no reason to expect it will happen again anytime soon. As the chart below shows, the world's markets are hardly doing badly....

Does this look like a panic situation? Yes, Q3 earnings WERE bad – we knew that, the Fed knew that – why do you think they rolled out QInfinity with $80Bn a month pumped into the system in October, November and December and another $40Bn through 2015 or longer?

That's $1.44 Tn for 3 years – quite a lot of money really, so how likely is it that the Financials are going to tank the markets again? Their earnings have been a bright spot of Q3 and that was BEFORE they got promised another $1.68Tn over the next 39 months.

One third of the S&P has reported so far and another 160 report this week. [10] Zero Hedge [10] convincingly makes the negative case:

"Roughly one third of the S&P has reported earnings so far, with another third reporting in the next five days and almighty AAPL on deck Thursday evening, and if there is one word to describe what has happened so far, that word would be "ugly." The same word would be used to describe how Q4 is shaping up to be. And that word will be very a optimistic prediction of what 2013 will bring unless a major catalyst develops that pushes Congress to resolve the fiscal cliff situation. So far that catalyst is missing. But going back to Q3 earnings, here is how Goldman's David Kostin summarizes events to date: "3Q reporting season is roughly one third finished. Two early conclusions: (1) Information Technology results have been startlingly weak with high-profile revenue disappointments by the four horsemen: MSFT, GOOG, IBM, and ORCL. (2) EPS guidance for 4Q has been overwhelmingly negative across all S&P 500 sectors with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect further EPS cuts of 6% loom ahead..."

[11]

(Q3 Earnings Season To Date Summary: Ugly... And Getting Worse [10])

Q3 earnings are likely to be a prime example of "what doesn't kill us makes us stronger," as we're seeing all of the ugliness of the Global market laid out in the P&L statements of US Corporations. Companies that do the most International business are taking the biggest hits, while companies doing most of their business in the US appear to be less affected.

This week we'll hear from AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX.

Of the 117 firms in the S&P that have now reported 3Q results (34% of total cap), 37% of companies beat earnings estimates and 21% missed. In a typical quarter, 41% of companies exceed EPS expectations and 13% miss.

As you can see from our Big Chart, the close-up view of US equities is looking pretty ugly. However, the 50 dmas haven't bent down quite yet, and the 200 dmas are rising too, so it's probably too early to throw in the towel. We did publish a set of Disaster Hedges this weekend [8] – just in case those lines fail to hold up.

Our goals for the week are going to be simple, we'd like to see the Dow hold the 50 dma at 13,350, the S&P 1,433 is also right on its 50 dma, the Nasdaq must hold its Must Hold line at 3,000. If AAPL's earnings don't get the S&P back over 3,100 and AAPL's own 50 dma – we're going to be a bit more bearish overall.

The NYSE is still well over 8,217, which is the 50 dma and still well above its must hold line at 8,200. It won't be technical Hell until our broad index fails us there. The Russell is very volatile but represents companies that do a larger percentage of their business in the US than the S&P or the Nasdaq, so we REALLY need to see it back over its 50 dma at 830. We REALLY don't want the Russell to fail to hold the Must Hold line at 800 – that cross, with the NYSE crossing 8,000 would officially mark the end of hope – all the way back to the 200 dmas.

Keep in mind the Nasdaq is down the most because AAPL is 20% of the index and has dropped 13.6% since September 24, losing $90Bn in market cap in less than a month, or essentially the entire value of AMZN. That has dragged the Nasdaq down an additional 2.7%.

So it is a little early to throw in the towel but it's not too early to be prepared; that's what our Disaster Hedges are for. Shorter-term, the Dow has some support at 13,200 if it fails to hold 13,350, but then it's a quick ride back to 13,000. The DIA November $135/131 bear put spread is just $1.90 and pays $4 if the Dow is below 13,100 on Nov 16. It's a nice hedge where you can take a small loss if it gets back over 13,350, where your $135 put is still $1.50 in the money.

The last Presidential debate is this evening and then it's just 15 days to the election and we have our Fiscal Cliff to worry about. We're not out of the woods – be careful out there.

Try Phil's Stock World out here >  [8]