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The recent declines in stocks bring to mind a cup of cappuccino: Investors blowing the froth off the top before getting to the substance, in this case earnings reports or any real news.
The pullback last week targeted high-flying industries — such as the biotech portion of the healthcare sector, and the Internet portion in tech — that investors think may have been overbought in the 2013 surge.
And as we are only now just getting into first-quarter earnings season, the movements that have been the most obvious in the market lately are clearly driven by investors’ anticipations of what the reporting season will hold.
Sure, a lot of data came in over the past several trading sessions. But just as it was last week at this time, the data regarding stock price movement has been the only meaningful data available. And I am very skeptical that what we’ve seen in terms of price movement last week and the beginning of this week should have a meaningful impact on investors’ analyses.
In short, I don’t think there’s anything to see here.
We’ve also had a continuation of the flight to defensives, which  dismisses a bullish near-term outlook.
And I cannot deny that my confidence has been shaken in one of my still-favored sectors — technology. But thus far the only worrying signs are in tepid bidding action, and some sizeable selling volume in select shares.
There is a certain symmetry between this current period’s tech profile (bullishness in terms of the Weiss Ratings) to a period right around the same time last year. And just like last year, the market is unsure about where formerly leading sectors would go as the year progressed.
And just like last year, investors are braced for any downplaying of guidance by management teams as this earnings season progresses. But the stock price action is obviously only part of what I consider. The Weiss Ratings always form the basis for decisions I make in the Weiss Ratings Portfolio. The analytical choices I make independently from the Ratings are merely enhancements to account for short-term deviations from what the numbers say on their own.
Right now, I don’t think the minor changes evident in the overall bullishness/bearishness of the Weiss Ratings over the past week or so are meaningful, just as I don’t take the recent market action at face value.
Tech still looks good to me, even though I’ve become more guarded in the wake of the market’s obvious distaste for leading names here in recent sessions. That’s because short-term market action is typically a better indicator of entry/exit points than it is with regard to fundamental assessment — the ultimate goal of the Weiss Ratings. Because the shares in this sector have pulled back beyond any fundamental basis (i.e. earnings have not yet been reported, so we don’t yet have the data necessary for reassessing stocks on an updated fundamental basis).
These holding patterns at the beginnings of earnings seasons are to be expected with quantitative models. My sense is that the market has just been expelling some excess froth in some of the favored sectors and industries out of fear that last year’s rally was overdone. The fear stems from a notion that 2014 and beyond will not pan out as well as we had originally anticipated.
I say the jury’s still out. I continue to follow my discipline in selectively adding to cyclically-oriented areas of the market.
Best,
Don Lucek
