Are Earnings Making Markets Dip?

Stocks headed lower on Wednesday after a number of disappointing earnings reports — especially from Caterpillar (NYSE:CAT) — put investors in a risk-averse mood. Wednesday’s most important contrarian indicator was a remark made by former Federal Reserve Chairman Alan Greenspan during a televised interview, in which he said that stock prices are “relatively low.” Greenspan’s assessment of the market probably encouraged more selling than what we would have seen if he had just kept his opinion to himself.

On the other hand, an earnings beat by Boeing (NYSE:BA) sent its share price flying 5.34 percent higher, as a number of other aerospace stocks headed to the stratosphere on earnings as well. Northrup Grumman (NYSE:NOC), which also beat earnings estimates, soared 4.04 percent higher. Lockheed Martin (NYSE:LMT) surged 1.48 percent after its own upbeat earnings report.

The Dow Jones Industrial Average (NYSEARCA:DIA) lost 54 points to finish Wednesday’s trading session at 15,413 for a 0.35 percent decline. The S&P 500 (NYSEARCA:SPY) fell 0.47 percent to close at 1,746.38. The Nasdaq 100 (NASDAQ:QQQ) dropped 0.62 percent to finish at 3,346. The Russell 2000 (NYSEARCA:IWM) declined 0.42 percent to end the day at 1,110.

In other major markets, oil (NYSEARCA:USO) sank 1.30 percent to close at $34.95. On London’s ICE Futures Europe Exchange, December futures for Brent crude oil fell $2.38 (2.16 percent) to $107.59/bbl. (NYSEARCA:BNO). December gold futures declined $9.20 (0.69 percent) to $1,333.40 per ounce (NYSEARCA:GLD). Transports were at cruising speed on Wednesday, with the Dow Jones Transportation Average (NYSEARCA:IYT) advancing 0.70 percent.

In Japan, the exchange rate for the yen continued to be the dominant factor in stock market activity. Stocks fell as the yen gained unwanted strength against the dollar. A stronger yen causes Japanese exports to be less competitively priced in foreign markets. The yen strengthened to 97.31 per dollar during Wednesday’s trading session in Tokyo (NYSEARCA:FXY). Honda shares sank 2.78 percent on the Tokyo Stock Exchange. The Nikkei 225 Stock Average fell 1.95 percent to 14,426 (NYSEARCA:EWJ).

A decision by the People’s Bank of China against adding funds to money markets because of soaring consumer prices, caused money market rates to surge, resulting in a stock market decline. The Shanghai Composite Index fell 1.25 percent to close at 2,183 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index sank 1.36 percent to end the day at 22,999 (NYSEARCA:EWH).

In Europe, stocks sank following a batch of disappointing earnings reports. Among the companies with bad news were Heineken, Orange (formerly France Telecom) and STMicroelectronics. The Euro STOXX 50 Index finished Wednesday’s session with a 0.94 percent drop to 3,017 – remaining above its 50-day moving average of 2,883. Its Relative Strength Index is 64.60 (NYSEARCA:FEZ).

Technical indicators revealed that the S&P 500 remained well above its 50-day moving average of 1,683 despite finishing Wednesday’s session with a 0.47 percent advance to 1,746. Its Relative Strength Index fell from 68.16 to 64.39. Although the MACD appeared to climb further above the signal line, the MACD histogram indicated a slight decline, suggesting the likelihood of a continued retreat.

For Wednesday, most sectors were solidly in negative territory, except for the industrial, consumer staples, and the utilities sectors. The energy sector took the hardest hit, falling 1.56 percent.

Consumer Discretionary (NYSEARCA:XLY): -0.64 percent
Technology: (NYSEARCA:XLK): -0.48 percent
Industrials (NYSEARCA:XLI): +0.04 percent
Materials: (NYSEARCA:XLB): -0.66 percent
Energy (NYSEARCA:XLE): -1.56 percent
Financials: (NYSEARCA:XLF): -0.81 percent
Utilities (NYSEARCA:XLU): +0.08 percent
Health Care: (NYSEARCA:XLV): -0.19 percent
Consumer Staples (NYSEARCA:XLP): +0.19 percent

Bottom line: A batch of disappointing earnings reports, most notably by Caterpillar, sent the major stock indices lower on Wednesday. On Thursday we’ll see weekly jobless claims, Markit PMI and home sales, along with earnings reports from Ford (NYSE:F), Xerox (NYSE:XRX), and Amazon (NASDAQ:AMZN), among others. While investors have been counting on quantitative easing and the Federal Reserve to power markets higher, now fundamentals appear to be raising their ugly heads as earnings slow and major players like Caterpillar offer negative forward guidance. As we’ve discussed, the Shiller P/E remains at elevated historic levels and would indicate the SP500 is approximately 50 percent overvalued.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

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