The Decline Will Bleed Out Slowly

We generally feel around here that the impending decline for the markets will not happen overnight – if fact the complete opposite. It will come very slowly like a cut the bleeds a lot over time. In general earnings have been decent and more than a quarter of the S&P 500 companies have reported.

Over 85% of the companies have reported higher earnings and 65% of companies have reported higher revenues. In aggregate, year-over-year earnings are up 192%. This sounds amazing, but it is largely priced in to the market. As a result, the comps are very easy to beat. Earnings for the rest of the week will include all sectors and we will get a broad-based view of where the economy is heading.

Many analysts expected December’s Unemployment Report to show growth. Instead, we lost 85,000 jobs. That does not include the 600,000 workers that were conveniently left out of the number because they have given up hope. Since then, each initial jobless claims number has been worse than expected.

I am not looking for a dramatic top and a free-fall. Earnings are strong and interest rates are low. In order to see a sustained decline these conditions (in combination with softer economic numbers) will have to change. Now that some of the optimism has been flushed out of the market, we are likely to see a bounce. Once this rally runs its course, we will get a feel for where resistance lies. Profit takers will be a little more aggressive and a warning shot has been fired.