Trader Talk

Are Markets at Inflection Point?


US Senate is voting today on the first parts of the financial reform bill. Barbara Boxer from California set to add language that no taxpayer money will be used to bail out financial institutions. Looks like the $50 billion fund set for an orderly liquidation of a failed bank is dead.

Note that big capital banks most affected by this, like Citi or JPMorgan , are down but not down as much as the big regional banks like Fifth Third or SunTrust , which have had much bigger price runups recently. Again, a sign of a general "asset puke" of highly valued, high beta names.

Note that commodities all ended right at the lows for the day, so we are talking about a fairly wide asset puke today.

So are we at an inflection point? The rally from the March low has been better than 80 percent. Some are saying that the March low was a generational low (bold claim), but it certainly is clear is that expectations have been very high for the recovery.

How much more upside is there? Traders are mostly bearish, but half are only bearish for technical reasons: traders need to take profits. These are the momentum guys.

The other half are bearish for fundamental reasons and think it will clearly be tougher from here to the rest of the year.

The reason: high earnings expectations already built in. Top-down analyst consensus for earnings on the S&P 500 is in the low-$80 range. That's only a couple dollars away from where we were in 2006...a tough call given how dysfunctional parts of the global economy are right now.

April retail sales out Thursday: a tougher call than March. We had the advantage of Easter in March, and reports of strong sales going into that holiday.

April is a tougher call. We have early positive signs: Ann Taylor , for example, said this morning that earnings for the first quarter will "significantly exceed expectations" and that comp store sales will be up approximately 11 percent on "meaningful traffic improvement."

Retail Metrics notes that 26 retailers have a comp store estimate range of 4 percentage points or more; a few like American Eagle , Kohls , Saks , Gap , and Abercrombie & Fitch have variances of 9 percentage points or more from the high to the low estimate. That is a large variance when we are mostly expecting gains of only high single digits for most.

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