Monday, May 12, 2014
Pre-open sentiment indicates a positive open for the market today, building on the favorable overnight market activity out of Asia and Europe. But the day's trading action will likely be no different from the trend that has been in place in recent weeks - stability and largely positive movement in the large-cap indexes and continued loss of ground in the small-cap space.
We are in a seasonally weak period, with not much in terms of catalysts that can push us out of the recent trading pattern. The Q1 earnings season has come to an end for 10 of the 16 Zacks sectors, with the retail sector as the only one with any meaningful number of reports still to come. The best-case scenario for the retail sector earnings is that they are no different from what we saw from other sectors. Recent estimate revisions trend for major retailers like Wal-Mart ( WMT ), Target ( TGT ), Macy's ( M ) and others reporting in the coming days is pointing towards downside risks to current expectations. Meaning that the sector's Q1 results could actually be weaker than what we saw from other sectors.
On the economic docket, the April Retail Sales and Industrial Production numbers coming out this week will likely reconfirm that the U.S. economy starting thawing in April - a trend that we have been seeing in recent economic data. The U.S. economy flat-lined in Q1, but estimates for Q2 show a strong rebound, with consensus estimates of GDP growth north of +3% and some of the more optimistic forecasts as high as +5%. The outlook for the second half of the year and beyond reflects comparable optimism, with U.S. economy expected to finally 'graduate' to an above-trend growth.
Economic growth has no doubt improved in the current period, but not everyone is buying into the supposedly favorable outlook for the second half and beyond. That's the way how most people will interpret the bond market's reaction to recent positive economic data. The bond market isn't infallible and could very well be misreading the current situation. But it will take at least a few more months of positive economic data to disprove its skepticism
The Dow Jones Industrial Average finished at record level on Friday and the S&P 500 isn't that far behind either. But the situation is different at Nasdaq where many of the high-flying momentum stocks live and in the broader small-cap space. Hard to tell at this stage whether the sell-off will remain restricted to the momentum and growth stocks space or will eventually bleed into the broader market indexes. But the trend doesn't appear to have played out yet.
Director of Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.