A Trifecta of Concerns Could Drag Wall Street Lower

July 24, 2012 /

Fresh worries about the health of Spain turned last week’s rally around in a day. As a result of the U-turn, the NASDAQ’s chart is in a bad way. For a trend to continue, in the current case up, there must be a series of higher tops followed by higher turnaround lows.

Last Thursday’s close, which is the high for the most recent buying spree, is lower than early July’s peak. From a chart watcher’s view, that’s a major warning flare. Now, the race is on; will the index break the trend-line that connects saw-tooth lows going back to June or climb to new heights first?
The answer is important because it will dictate the market’s next direction.

In addition to lows and highs battling it out, stocks are getting tugged higher on earnings; although, chief market strategist at ConvergEx in New York, Nicholas Colas says Wall Street’s earnings revisions point to a recession late in 2012 or early 2013.

Colas declares, “This trend (lower earnings outlooks), however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later into 2012 and 2013.”

Until then, profits are doing okay as 6 out of 10 companies have topped Wall Street’s expectations. Sales surprises, on the other hand, are coming in at 4 out of 10. The disconnect between top lines and bottom lines is what is worrisome.

Analysts believe the European debt debacle and China’s slowdown have finally made it through customs and are now affecting US business negatively. Some say China is fudging the numbers a bit and that its economy is in much worse shape than reported.

As some of our largest trading partners sink, they are grabbing on to American ankles and pulling us underwater too. Welcome to the global economy. While earnings don’t show it yet, water is running into the nose of economic reports.
Announcement after announcement, from retail sales to manufacturing to employment are disappointing. If Nicholas Colas is right that earnings are about to follow, then Ben Bernanke and the Federal Reserve will likely launch QE3 – which brings us to the week ahead.

The FOMC is scheduled to meet next Tuesday and Wednesday. In a sick way, Wall Street has to root against Main Street. ETF Stocks knows many are asking what’s new about that.With each passing economic disappointment, the case for more digital dollars builds. All of the week’s news will be seen through the prism of the Fed.

With or without more Benjamins, the combination of earnings’ worries, limp economic results, and a failed rally add up to heightened risk for investors. Perhaps, that’s why “defensive” utility stocks are popping up on ETF Stocks’ buy screens like popcorn on a flame. An exchange-traded-fund like Utilities Select Sector SPDR (XLU) might do better than most if the trifecta of fears translates into a correction.

 

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