When aluminum producer
reports first-quarter results after the bell on Tuesday, April 10,
will officially be underway. What happens to stocks for the next
two to three weeks will almost exclusively be a function of what
major companies have to say about current business trends. Few
investors will have time to focus on anything else -- but they
should. Behind the scenes, a steady release of economic data --
especially regarding consumer, business and investor sentiment --
will dictate the trading mood well beyond the current earnings
We just got a clear read on how small businesses are feeling. The
NFIB Small Business OptimismIndex , which I focused on
, was released on April 10. The news is sobering. After six
straight monthly gains, theindex fell in March, thanks to a
pullback in nine of the 10 components that make up the
. And the analysts at NFIB deliver a real wake-upcall after parsing
"The mood of owners is subdued -- they just can't seem to shake off
the uncertainties out there, and confidence that the management
team in Washington can deal with the effectively is flagging. What
we saw in March is painfully familiar -- this was the same pattern
of growth followed by months of decline from 2011. History appears
to be repeating itself -- and not in a good way."
As I wrote a month ago, "this index actually spiked to 94 last
January and February and then dropped back into the 80s. If you
sold stocks in April after seeing the NFIB pullback in March 2011,
then you would have avoided the heavy losses the
produced later that summer."
The current reading of 92.5 isn't a disaster but the trend needs to
be watched. Here's what else you should keep an eye on in coming
1. Mutual-fund inflows
One of the key factors behind the recent rally has been a decision
managers to put their idle cash into play. For mutual fund
managers, the move was a bit curious, as funds flowed out of
domestic stock funds in the first quarter due to residual wariness
by individual investors. That means mutual funds have used up much
of their latent firepower, unless they get more money to put to
Will that happen? History is promising. After people send off their
tax returns, oftentimes their next move is to replenish their
retirement plans, so the second half of April and May are usually
periods of net inflows to mutual funds. The key question: Will
investors earmark those funds for equity funds and exchange-traded
funds (ETFs) or
mutual funds and ETFs?
You can track the
weekly flows here
. According to Lipper,
are getting most of the love right now, as many investors failed to
be seduced by the market's recent upturn.
2. Individual investor sentiment
There are some investors that remain quite
. According to the most recent weekly snapshot of investor
sentiment from the American Association of Individual Investors
(AAII), bulls outnumber bears by a four-to-three
. That shouldn't make you bullish, however, as investor sentiment
actually tends to negatively correlate with future market
direction. In fact, I would love to see this indicator turn starkly
negative, which would be great for stocks, as I wrote about
back in 2010
Bulls really predominated this survey in early February of this
year, casting more than 50% of the votes (while bears had just
20%). That bullish reading stands at just 38% (as of April 4), so
we may be seeing a move towards a "stocks are hated" backdrop.
3. What about the banks?
Professional money managers often seek out the direction of banking
stocks before making any buy or sell decisions. That's because this
group tends to provide a read on broader economic trends.
A quick look at regional banks in this chart should give pause...
4. Consumer sentiment
Twice a month, pollsters at the University of Michigancall 500
households to ask about their personal sense of well-being and
their opinion on where the
is headed. The latest reading, which will be released this Friday,
April 13, could be a tough one because it comes on the heels of
last Friday's underwhelming monthly employment report.
The consumer sentiment reading stood at 77.1 at the end of
March, which was among the highest readings in four years. (The
index peaked at 77.5 in early 2011 and then slumped badly into the
summer, dropping to a low of 55.7 last August.)
This time around, economists are all over the map, with some
expecting a pretty sharp pullback to 74, which would be the lowest
of 2012 so far, while the most bullish economists anticipate a move
up to around 78.5.
Risks to Consider:
It's crucial that you not fixate on one data point to dictate
your next move. Economic data are notoriously erratic, and the
trend is more important than any single reading.
Action to Take -->
Treat these data points as part of a mosaic. If all of them are
pointing in the same direction, then you need to take heed.
Friday's employment report was surely sobering, as was the
just-released NFIB Small Business Optimism Index. Even as you track
earnings season, keep an eye on these indicators and plan
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA in one or more if its "real money" portfolios.
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