MARKETS SPECTATOR: Lucky dip

Record cash levels and underperforming fund managers will see any pullback viewed as a buying opportunity.

Following the biggest fall on Wall Street in four months, which surprisingly coincided with the 25 year anniversary of the Black Monday crash, there seems to be a bit of nervousness ahead of tonight’s session.

Friday’s fall in the US was all about weaker-than-expected earnings, which to be honest have been spoken about for the best part of a month. Heading into Q3 earnings, expectations had been for the first decline in profits for three years, with current estimates now anticipating a 1.8 per cent decline in S&P 500 profits.

But, the surprises haven’t been broad-based. Rather they have been more focussed on the technology sector, where expectations had not been lowered as much as say the materials sector, which was expected to deliver a very weak quarter. Hence, there has been a lot more selling among the technology names rather than other sectors, which had already priced the weakness in. The two charts below picture this perfectly.



Source – Bespoke Investment Group

So what does it mean in terms of prices? Well, if the trend of disappointing earnings continues then we would expect to see the weakness continue, although it’s hardly like stocks have been hit hard. The S&P 500 is only down 1.5 per cent since Alcoa reported versus a gain of roughly 14 per cent year to date.

And there are encouraging signs, with buyers willing to step in and buy on the dip. Of the S&P 500 companies that have missed estimates by between 0 and 5 per cent, their stock prices have actually outperformed the S&P 500, which shows that participants are buying weakness.

Also, with the market up so much for the year, there are plenty of professional money managers underperforming their benchmark because they simply haven’t believed in the rally. They are now under pressure to play catch-up, or at least match their benchmark into year-end, which means buying stocks during any pullback. Cash positions are also around 20 year highs, which will add further buying support on the dip.