The Next Month Is Shaping Up As Worrisome for Earnings and US Stocks

03/27/2015 5:41 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

MoneyShow’s Jim Jubak thinks it might be time to raise some cash, both to reduce portfolio risk and have some powder dry in case a stock overreacts and gets attractively cheaper, so he suggests taking a look at stocks in this sector.

I think we’re entering a dangerous month, or so, for US stocks.

I am not talking about crashes, or bear markets, or even a 10% correction. But I do see increasing risk of a further retreat from 2015 highs. Yesterday, the Standard & Poor’s 500 continued its recent stall and today—despite a slick recovery—the index finished just below (at 2061) the 50-day moving average that now stands at 2068.

A stall like this—of a few days duration—wouldn't concern me much except that:

  • The markets got a weaker than expected third estimate on fourth quarter GDP on today, March 27. This is old data, but a revision that said growth was only the 2.2% of the last estimate, instead of the hoped for 2.4%, added to fears that the US economy isn’t as strong as hoped. To anyone betting on lower interest rates and higher bond prices, that might be good news, but I think we’re at a point where bad news for the economy actually means bad news for US stocks.
  • And that’s because we’re headed into a first quarter earnings season with Wall Street fearing that a stronger dollar (and slow global economic growth) have resulted in a decline in earnings for the period.  Alcoa’s (AA) report after the market close on April 8 kicks off an earnings season that, right now, expects will show a 4.8% year over year drop in earnings by the companies in the S&P 500. A year over year decline would be the first such drop since the 1% decline in the third quarter of 2012. A 4.8% drop is a big hit to earnings—absent anything like a recession—and will seem even bigger since at the end of December Wall Street analysts were projecting a 4% increase in earnings for the first quarter.
  • In the last month, company guidance on revenue and earnings has been weighted to the downside. According to Factset, as of March 20, 83 companies had issued negative guidance for the first quarter against just 16 companies releasing positive guidance. That’s enough to make markets jumpy.
  • Even before earnings season itself starts, the market will have to cope with early warnings from companies that anticipate they are about to announce disappointing results. Yesterday, March 26, SanDisk (SNDK) contributed to weakness in technology shares when it lowered its guidance for first quarter revenue below analyst estimates.
  • Signs that investors and traders are looking to take profits in recently better performing sectors has the potential to lead to further selling as latecomers catch up with the move. From this perspective, the 6.8% drop in the iShares NASDAQ Biotechnology ETF (IBB) for the week through Thursday is exactly the kind of move to worry about.

I think it might be time to raise some cash, both to reduce portfolio risk and also to have some powder dry in case a stock that you’ve been eying overreacts and gets attractively cheaper. I’d watch the technology sector because it has looked weak recently, because it outperformed earlier in the year, because we’re entering a seasonally weak period for technology shares, and because profit taking in some better performers might create a bargain or two. Two or three I’m watching include NXP Semiconductor (NXPI), Palo Alto Networks (PANW), and Synaptics (SYNA). And, of course, there’s always Apple (AAPL), where I’m looking for a good price for a re-buy.

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