Falling Stocks, But No Signs of Fear

Zacks Market Analysis: Falling Stocks, But No Signs of Fear

by Charles Rotblut

Fear continues to be absent from the markets.

Despite the sustained selling pressure, there is a lack of fear. The VIX remains well below the levels seen earlier this year and gold, though having risen recently, is not surging. Volume has not been strong, though this is a holiday-shortened week.

I think the reason fear has not set in is that many investors, both institutional and individual, are uncertain. The trend in earnings estimate revisions is not very negative. The economy is sluggish, but is still expanding. Financial companies are likely to report terrible second-quarter earnings, but profits for energy firms should gush.

In other words, we are still seeing two markets at work.

The trend in full-year earnings estimate revisions is one of factors that has me scratching my head. During the past four weeks, there have been 1,824 positive earnings estimate revisions and 2,205 negative revisions, a ratio of 0.83. At the end of March, the ratio was 0.57, which signaled nearly two cuts for every forecast that was raised.

Looking at the second quarter, nearly 60% of the companies in the S&P 500 are expected to have grown earnings. Granted, the pace of growth will not be impressive – the median company is expected to report a 6.8% increase in profits, but there will be growth.

I think there is a general disbelief in earnings projections right now. The biggest fear is that tech profits could be very disappointing. Nvidia (NVDA), which makes graphics chips, cut its guidance yesterday. The company did have problems with its notebook PC processors, so there could be company-specific issues going on, but we’ll have to see what other tech companies say. Keep in mind that Dell (DELL), Hewlett-Packard (HPQ) and Cisco Systems (CSCO) will not report until August.

Gold Still Below March Levels

They say a picture is worth a thousand words, so I’m displaying a chart of gold this week. SPDR Gold Trust (GLD) is an ETF that tracks gold bullion. (I thought it would be better to show the ETF because it is easier to buy an exchange traded fund than a futures contract.)

Notice in the chart that the price of gold remains below the highs seen in March. If there was truly fear, I would expect the price of gold to be higher.

To be fair, the dollar’s ability to hold a trading range and the sheer fact that oil is the hot commodity right now are both negatively affecting gold. Nonetheless, I am not seeing evidence that investors are shifting allocations to gold, which has traditionally been a hedge in turbulent times.

Bear Territory

For all practical purposes, stocks are in bear territory. Given that General Electric (GE) is reporting next Friday and several financial companies will release second-quarter results during the third week of July, it would not surprise me to see stocks trend lower over the next two weeks.

What frustrates me about the pullback is that the selling is so indiscriminate. Good companies are being taken to the woodshed. I’m seeing this occur with stocks in the Focus List and stocks outside of the Focus List. At least if there was fear, I could explain why the markets have suddenly tumbled lower.

We are trying to use patience with the Focus List and not make any irrational decisions, but we will exercise stop limits on some stocks we would not otherwise sell. On the other hand, I do expect some buying opportunities to appear as earnings news comes out.

Focus List Update

Acuity Brands (AYI) warned yesterday. We will provide an update about the stock in the portfolio alert that is sent out on Monday morning.

To learn more about Zacks Investment Research go to http: www.zacks.com.

This article can be found at http://www.zacks.com/commentary/8004/Falling+Stocks%2C+But+No+Signs+of+Fear+800400

Charles Rotblut, CFA is the Senior Market Analyst for Zacks.com. He can be reached at crotblut@zacks.com.