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How Can Stocks Build on This?

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Wednesday, February 26, 2014

Stocks haven’t done much in the last couple of sessions after making a new intraday high early in the week. The reason is that the market simply doesn’t have the fuel to push it higher. Hard to tell how long this period will last, particularly with a bunch of top-tier economic data coming out next week. We may make a fresh new high in the market in today’s session, but my sense is that we will have to wait at least through April to make a clear breakout.

Investors bought into the weather explanation as the reason for the recent run of soft economic data. The hope is that the economy’s fundamentals remain strong and the recent run of soft manufacturing, housing and consumer spending data will turnaround once the skies clear up. The problem is that we wouldn’t get ‘clean’ data at least for another month as next week’s manufacturing ISM, consumer spending and labor market (non-farm payrolls & ADP) will continue to show weather-centric distortions.

With economic data less reliable due to weather, the emerging market noise dying down a bit and the Q4 earnings season winding down, we simply don’t have any catalysts that can give this market a clear directional nudge.

The earnings season was largely OK, not materially different from what we have been seeing for more than a year now. Earnings growth was better than recent quarters due to easier comps, more companies beat earnings and revenue expectations and total earnings for the S&P 500 reached a new all-time quarterly record.

Offsetting these positives, we saw continuation of soft top-line gains and continued negative guidance, prompting estimates for 2014 Q1 to come down. In terms of guidance, this morning’s Target (TGT - Free Report) and Dollar Tree (DLTR - Free Report) reports are no different from what we saw from Wal-Mart (WMT - Free Report) the other day.

The market’s bias is no doubt to the upside. But I find it hard to believe that the stocks could build on current levels in the absence of a material improvement in the economic and corporate earnings backdrop. We will see how things shape up, though I expect stocks to drift down over the coming days & weeks.

Sheraz Mian
Director of Research

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