FADING THE RALLY

Over the last several weeks there have been numerous fleeting glimpses of the market's change in character.

Earnings have been a disappointment and thus after earnings forecasts were already severely slashed before the season kicked off.


Earnings Analysts who once expected profit growth of 14.6 percent had cut their estimates all the way down to 6.8 percent by the time Alcoa kicked off earnings, so the bar was lowered substantially.


Dave Kostin of GS contradicts GS's trading desk call for a long Russell 2000 trade made last week when Kostin reported that after trimming all of the fat from corporations, Q4 earnings have shown that margins are declining and this time we can't blame inflation in commodities. In Kostin's view, "The economy has peaked and is rolling over."

As of last Friday, with 39% of the S&P having reported, positive earnings surprises are near record lows.  One Hundred and ninety five companies have reported, they represent 53% of the equity market cap. of the S&P-500. The percentage of firms beating consensus EPS expectations by more than one standard deviation (the definition of a positive surprise) is well below the historical average. The number of firms missing by more than one standard deviation (a negative surprise)  is above the historical average. The ten year historical average of beat and misses equals 41% and 13%, respectively. So far this quarter just 24% of firms beat expectations and 17% have missed and this on already slashed expectations by analysts.

As you know, last week the Dow slipped to the first weekly loss for the year, as I pointed out this week the declining rate of change in price.

 As I have been saying, this in my opinion is the infamous bear market rally that occurs after a major top is broken as we saw in late July of 2011. Bear market rallies are meant to look strong, convincing and to get bulls back in the market, that is the only reason they exist. The 1930 bear market rally after the 1929 crash, gained 45%! After that the market tumbled for several more years taking the Dow from $383.90 to $40.60.

 Remember the days when a 1% gain in the Dow was an average day? We haven't seen the Dow gain or lose 1% in 18 days going on our 19th now., the Blue indicator below shows the % change with the 10-day (2 week) average of the Dow's % change coming in at -.04%, not even 1/10 of a percentage point!


The S&P over the same last 2 trading weeks is currently at a gain of just about half of one percent!

There have been numerous glimpses (we often find the most meaningful information in fleeting glimpses) showing a change of character in the market, and this with extremely high dumb money bullish sentiment and extremely low bearish sentiment, it's the perfect match for a bear market rally.