Approaching Correction Country?

 | Jan 20, 2012 | 8:05 AM EST
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There were two ways to be happy: improve your reality, or lower your expectations. --Jodi Picoult

We have had a good run so far in 2012 and now the big question is whether earnings report are going to be the catalyst for some profit taking. We are technically extended on light volume, so conditions are good for some sell-the-news action. But when the setup is this obvious we have to be careful about taking it for granted.

Google (GOOG) missed both top and bottom line estimates and is selling off sharply. It has bounce back quite a bit already, but it is still a major issue. The good news is that GOOG often marches to its own drummer and often doesn't impact the broad market action all that much. In addition Microsoft (MSFT), Intel (INTC) and IBM (IBM) are all trading up a little on OK reports while American Express (AXP) and Intuitive Surgical (ISRG) are seeing some softness.

Historically, the setup here favors the bears. According to, when the QQQ has a positive open the morning following the January INTC earnings report, it has been negative over the next two weeks seven out of seven times. The good news is that the QQQ is indicated negative at the moment so that statistic may not be applicable but the clear implication is that INTC earnings have a tendency to mark turning points.

I don't want to be overly negative here because even if we do have some near-term weakness there is no indication that it will be anything other than some healthy consolidation after a good run. We have to be very careful about anticipating a major market reversal rather than just a bout of some profit taking after a sizable move. 

In fact, some selling at this point would probably be more of a long-term positive than a negative. We need for short termers and less-confident bulls to move out and the stronger and more optimistic dip buyers to move in. We can work off overbought conditions fairly fast and we clearly are in an uptrend and don't have much overhead resistance to content with. Some backing and filling would provide a good foundation.

The dip buyers remain the key to the market. Their very persistent support has kept this market chugging along. We have barely had a pullback so far in 2012 and when that is the case the underlying support usually doesn't disappear too quickly. We have created a huge supply of anxious buyers who would love to buy lower, but have not had a chance to do so since mid-December. They are going to prevent this market from suddenly falling to pieces unless there is some major negative news.

At the moment, we are setting up for a mild start. But we have to be increasingly on guard for a reversal. Our last major pullback developed as second-quarter earnings hit in July 2011. That set us up for a major free fall in early August. At that point, earnings reports were quite solid. But we ran out of gas and European worries took hold.

The two stocks I'll be watching most closely are INTC and IBM. I see at least one downgrade of INTC and IBM seems to be benefitting more from low expectations rather than strong numbers. The numbers were roughly in line and if the stock fails to hold in positive territory that should have implications for the broad market.

Proceed with caution here. The bears have some ammunition to work with and if the dip buyers decide to stand aside for a while a correction could occur quickly.

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