Start of Earnings Season Today Sends Anxiety—and Profit Taking—Through US Markets

07/08/2014 4:42 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Sell offs, profit taking, and even a bit of déjà vu accompanied the start of earnings season, and MoneyShow's Jim Jubak shares a list of the biggest drops for the day, stocks that racked up the most gains in the recent rally.

Traders and investors are taking profits in US stocks today ahead of the start of earnings season with Alcoa (AA) set to kick off the reporting period after the close today.

With indexes at an all-time high-the Dow Jones Industrial Average closed above 17,000 for the first time ever just before the Fourth of July holiday-there's caution that earnings won't live up to expectations that are now priced into these markets.

As of 1:30 PM New York time on July 8, the Dow was down 0.71%, the Standard & Poor's 500 was off 0.74%, and the NASDAQ Composite was lower by 1.45%. The Russell 2000 index of small company stocks was down 1.3%.

As that pattern suggests, the biggest drops for the day are coming in the stocks that have racked up the biggest gains in the most recent part of the rally. The iShares NASDAQ Biotechnology ETF, for example, dropped 2.3%. Twitter (TWTR) was down 6.81%, Pandora Media (P) down 6.36%, Tesla (TSLA) down 1.94%, Facebook (FB) down 3.61%, LinkedIn (LNKD) down 6.53%, and YELP (YELP) down 6.98%. (If this feels like a replay of the last market sell off, which hit these same sectors and stocks hard, that's because it is.)

Whether this is a brief bout of profit taking or a more serious and extended correction depends on how earnings season develops. Earnings for the stocks in the S&P 500 (SPX) are projected by analysts to be up 5% in the June quarter and revenues are projected to be 3% ahead for the quarter, according to Bloomberg. That's not a huge hurdle to jump, but after the most recent move upward, the S&P 500 is trading at 16.7 times projected earnings. That's near the highest valuation since the end of 2009 and above the five-year average of 14.3.

After Alcoa's report today, the next companies to report (mostly next week) include financials Wells Fargo (WFC) this week and Citigroup (C), JPMorgan Chase (JPM), and Goldman Sachs (GS) next week, Johnson & Johnson (JNJ), Google (GOOG), Schlumberger (SLB), and Johnson Controls (JCI).

The Chicago Board Options Exchange Volatility Index (VIX) that tracks expected volatility in the S&P 500, jumped yesterday, July 7, by 9.8% from a seven-year low. Many analysts think recent lows in the VIX mark complacency among traders and investors.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I managed, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund shut its doors at the end of May and my personal portfolio is now in cash. I anticipate putting those funds to work in the market over the next few months and as I do I'll disclose my positions here.

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