Stock Market Acting as Expected

Cited here are International Business Machines (IBM - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report), along with the Dow Jones Industrial Average ($DJI) and the S&P 500 (SPX).

Yesterday's big jump was nice, but by no means was a sign that the stock market is out of the woods.

Until recently, I would never refer to a 280-point move on the Dow as being completely expected, but yesterday's move was just that. It was a bounce predicted by technical analysis and fueled by good earnings from International Business Machines (IBM - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report).

Since October, the Dow Jones Industrial Average ($DJI) has only closed below 8,000 three times. Tuesday was one of the occurrences. And each time, the average responded by making a large upward move.

Equally telling is the stochastics. During the past few months, the stochastics has done a good job of calling short-term trend reversals.



The inherent problem with technical analysis, however, is that a trend holds until it doesn't. And the current trading range, like all other trading ranges before it, will eventually end. The only question is whether the Dow makes a downward breakout (bearish) or an upward breakout (bullish).

As much as I would like to be an optimist, I continue to think the Dow could fall to 6,300 or lower. Such a move would bring P/E multiples near single-digits -- something that has not occurred since the mid-1980s.

The reason for this pessimism is that profit projections continue to be cut across the board. Out of the more than 200 industry groups that we track, just 11 industries have more positive earnings estimate revisions than negative revisions.

Earnings estimates for the S&P 500 (SPX) tell a similar story. In November, analysts projected that 2009 profits would total $93.73 per share. As of yesterday, the average forecast was $62.73, a 33% drop. More telling, the current consensus earnings estimate is below most pessimistic projection of just 2 months ago.

Due to the severity of the recession, brokerage analysts don't know where to peg their forecasts. As new data becomes available, however, they are cutting on a massive scale. And as the "E" falls, so must the "P" in P/E.

Read the full analyst report on IBM