Although market declines on earning miss, market participants do not run into panic selling. Selling mostly comes from day traders who are making quick profit on swift market movement. Market manipulators remain cautious to participate in the selling. Therefore this market pullback may be opportunity for risk takers. Selling may not last long as there are few sellers dumping shares for cash and few speculators short selling stocks.
Long term investors confidence has not been shaken by the market glitch. With plenty of cash on hand, institutional and individual investors do not participate in the selling but are waiting patiently on the sideline. Since institutional investors are trying to catch up in investment return, the pullback appeals to some aggressive investors. But market participants confidence in the market is still weak. The pullback may extend longer until it becomes attractive to buyers. The amount of surplus capital circulating in the financial system is tremendous. Once the bottom is reached, the rebound would cause market participants to buy in a herd. Market participants should wait with patience for the buying signal.
Stocks Are Down But Not Out Says Simon Baker
After ripping 14% higher from June until the first week of October, stocks ran headfirst into a wall of worry seemingly too large to climb. Europe, China, the fiscal cliff, etc aren't new concerns but that doesn't mean they aren't real. Investors suddenly care and are behaving accordingly, selling some of their more aggressive names and rotating into defensives.
"It's a good time if you've got some cash on the sidelines to be selectively getting in," says Simon Baker, CEO of Baker Ave Advisors, about the dark mood on Wall Street.
"In this type of market I don't want to be too contrarian," he says. It's a market for the nimble and the bold. He's not getting paid to wait; he's making money getting long ahead of the masses. Right now the environment is one of building fear; Baker wants the other side of the trade before traders reach back to the old familiar tech winners.
One last catch. Baker isn't betting on hunches ahead of earnings. He's staying nimble but not rushing. Wait for earnings, listen to the executives, then take your shot. As America gets more fearful into the election and the New Year, making money will require just a dash of prudent bravery.
High-Speed Trading No Longer Hurtling Forward
High-frequency trading firms — the lightning-quick, computerized companies that have risen in the last decade to dominate the nation’s stock market — are now struggling to hold onto their gains.
It is a swift reversal for trading firms that have often looked to other investors like profit machines, thanks to high-powered software and superfast data connections that can take advantage of small changes in the price of a stock.
High-speed trading is far from disappearing from the market, but the struggles facing these firms have been greeted with enthusiasm by some traditional traders and investors who have viewed the firms as formidable adversaries, or worse, market manipulators that create sudden spikes and drops in share prices. Peter Costa, a longtime trader on the floor of the New York Stock Exchange, said the fading presence of the firms could “restore some order to stock markets.”
The challenges facing speed-focused firms are many, the biggest being the drop in trading volume on stock markets around the world in each of the last four years. This has made it harder to make profits for traders who quickly buy and sell shares offered by slower investors. In addition, traditional investors like mutual funds have adopted the high-speed industry’s automated strategies and moved some of their business away from the exchanges that are popular with high-speed traders. Meanwhile, the technological costs of shaving further milliseconds off trade times has become a bigger drain on many companies.
The diminishing presence of these traders in the markets has not hurt the overall performance of stock prices. Leading indexes have been on a steady climb for the last few years. For high-speed traders, rising prices are actually a part of the problem: climbing stock markets tend to be calmer stock markets, providing fewer trading opportunities for high-speed firms.
Earnings Look Better, but Market May Not CareEarnings Look Better, but Market May Not Care
Earnings season may not be as weak as analysts had initially projected, but the bad news is that may not be good enough to cheer investors.
In the big picture, the market both may be unimpressed with the future earnings outlook and unconvinced of the initial numbers to get much optimism from early beats.
"Even if we are wrong about a turn in the earnings cycle and the profit share continues to rise, the stock market may still fall if investors become averse to risk," Higgins said. He compares the current economic recession to the climate following the second leg of the Great Depression in 1937-38 when the winds of World War II "trumped an improvement in profits at home."
"Company outlooks for the coming year will be of utmost interest, and we believe that estimates for the fourth quarter and 2013 should come down, which could cause volatility in the near term," strategists at Charles Schwab said in a report Monday.
"We believe that the earnings estimate revisions will have a significant impact on financial stocks for the remainder of the year," Cannon said. "Overall, stock prices have fared better than estimate revisions but have had a close directional impact."
Full Speed Ahead: Stocks May Top 2012 Highs
Technicians see an uptrend in place that could easily take stocks back to their 2012 highs.
Stocks in the past two days have been lifted by better-than-expected U.S. economic reports and earnings news, after last week's sell off.
The rally has confounded some analysts, who expected a bigger correction. "It has been a market with continued question marks, but we'll take the rally. We'll take the rally defensively," said Louise Yamada, managing director with Louise Yamada Technical Research Advisors.
"You read about traders that aren't trading. So who's making the volume? Is it the plunge protection team? The government's manipulating it? We don't have any answers to that," said Yamada. "We do have enough confirmation to think it could continue and we watch. You don't have as many stocks above the 200-day moving average as you did two weeks ago, but that doesn't mean it doesn't' improve. We could go higher."
Maxim Group technical analyst Paul LaRosa said he's cautiously optimistic the market will go higher, but he's also a little perplexed.
"It doesn't make any sense, but sometimes the market doesn't make sense and you have to listen to what the market's telling you and position yourself that way. If you did you would have been accumulating stocks all summer, and you'd be in good shape now. The questions is what do you do now," he said.
Risk Is Back: Fund Managers Bullish on Stocks
While bonds have been the asset class of choice this year, equities are quickly gaining favor among global asset managers as central banks pump liquidity into the financial system and investors grow less fearful of the euro zone debt crisis.
Roman Scott, chairman of investment management firm Calamander Group, said the investment case for equities is getting stronger given the liquidity boost provided by policymakers in the West.
"This very blunt tool of monetary policy to effectively keep money very cheap, in fact almost free, is designed to force all of us into risk assets. (Federal Reserve Chairman Ben) Bernanke wants everybody to buy equities and risk assets; the European Central Bank wants the same thing. I do think there's a good case that the risk-on position is looking more attractive," Scott told CNBC.
Roman Scott, chairman of investment management firm Calamander Group, said the investment case for equities is getting stronger given the liquidity boost provided by policymakers in the West.
"This very blunt tool of monetary policy to effectively keep money very cheap, in fact almost free, is designed to force all of us into risk assets. (Federal Reserve Chairman Ben) Bernanke wants everybody to buy equities and risk assets; the European Central Bank wants the same thing. I do think there's a good case that the risk-on position is looking more attractive," Scott told CNBC.
Meantime, optimism around U.S. equities fell for the fourth straight month, with just 10 percent of investment managers overweight the country's stocks, compared to 13 percent in September.
While U.S stocks have outperformed this year, with the Dow Jones Industrial Average hitting a near five-year high earlier this month, experts say future gains could be limited due to investor nervousness about upcoming third-quarter corporate earnings and profit-taking.
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