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Job Numbers Forcing "Review" Of Stock Models

The poor jobs reportis causing a rethinking of stock models, which are weighted toward certain sectors based on earnings expectations. Up until recently, many large traders were overweight tech, industrials and materials stocks on two assumptions:

1) The U.S. was unlikely to be entering a serious slowdown, and
2) That global growth would remain robust and that U.S. manufacturers would continue to benefit from a strong export market.

Traders were also overweight energy stocks under the assumption that high demand and tighter supplies would continue to keep prices high and capital expenditures relatively high.

As a result, earnings estimates for tech, industrials, materials and energy for the first quarter have not changed. Indeed, earnings assumptions for energy have actually gone UP.

But today's weak jobs report is forcing people to rethink the assumptions above. Essentially, the market is taking down Q1 earnings estimates for tech, materials, and industrials. What about energy? Q1 earnings will be strong, but to the extent that a slowdown impacts consumption and capital expenditures, even certain assumptions here can be questioned.

I said the market was taking down estimates--analysts have yet to react, but rest assured they will soon.

Elsewhere:

1) Russell 2000, the small cap index, closed at a 52-week low. This makes sense; small cap stocks are most exposed to the U.S. economy and cannot export their way out of their troubles.

2) Dow Transports also hit a 52-week low. Again, an expected slowdown has plagued airlines and truckers for the past 6 months; they have been a great leading indicator.

3) Consumer discretionary stocks (autos, retailers, home builders) hit lows right across the board, with names like Macys , GM ,Ford , and Hovnanian all at new lows. Again, telegraphing a consumer slowdown, but these stocks began weakening in October.

The question now is, where's the bottom? Bulls are already screaming to watch the financials in the third week, when earnings and guidance comes out and what some are expecting to be "the mother of all write-offs." Time to buy financials then? Maybe.



Questions? Comments? tradertalk@cnbc.com

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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