An Earnings-Driven Pullback

 | Nov 01, 2012 | 6:00 AM EDT
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Since the market low in 2009, we have only seen one instance of what I would term a "standard market correction" -- and that was the pullback seen in the summer of 2009. Ever since then, each correction has been filled with drama and catastrophe.

Consider that, beginning in May and through the summer of 2010, we saw a correction that began with the "flash crash" and was heightened by drama coming out of Greece and by the BP (BP) oil spill. The market was saved from more downside in late August, when Fed Chairman Ben Bernanke announced a second round of quantitative easing at Jackson Hole, Wyo.

We saw another correction in February and March of 2011. This one that began with the Arab Spring and was heightened by the Japanese earthquake and tsunami -- more tragedy and drama.

In the summer of 2011 we saw yet another decline due to the European situation, which was heightened by the downgrade of the U.S. debt. That was "solved" when the Europeans finally put in place a program called the long-term refinancing operation, or LTRO.

Those all have one common theme: They were triggered by macroeconomic events.

This correction is different, as it began with the announcement of more QE -- so clearly adding more liquidity will not stop this particular move. This time the slide is not macro-related; it is earnings related.  Now folks will likely start glomming on to the Hurricane Sandy story as being more meaningful. Or, should the presidential election get botched in some fashion, as it was in 2000, this could very well impact the market. However, for now, it is a different sort of correction from what we have seen in the past three years. Hurricane Sandy is a tragedy, but its drama has not impacted the markets -- yet -- in the same way those other macroeconomic events had done.

In addition, have you noticed that Europe is not the problem this time? The euro has barely budged, and the European markets have outperformed the U.S. markets. If we look at a chart of the iShares MSCI EAFE Index Fund (EFA), the Europe ETF, we discover it is nowhere near the uptrend line off the June lows. The fund is toying with its 50-day moving average, something the S&P 500 and Nasdaq did weeks ago before the 50-day line was broken on each.

In fact, here in the U.S., the indices are testing their 200-day moving-average lines, while EFA trades about 4% above its longer-term moving average.


Perhaps that's why sentiment refuses to get super-bearish -- there is no definitive macro event on the news each evening. As I have noted in the past few days, we continue to see complacency in the moving average of the put-call ratio and in the Market Vane readings. In Wednesday's trading, it was not much different: The index put-call ratio came in under 100% for the fourth time in five trading days, and the equity put-call was at 68%, something we haven't seen since mid-October.

For now, stocks are oversold -- but, thus far, all the indices have done is to tread water. My mother insists everyone is waiting until after the election. I didn't ask, but it was probably the "guy on the radio" who said it enough times for her to repeat it to me!


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

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