Behind the Money

'All or Nothing' Markets: Even Earnings Don't Matter

Many fund managers had been hoping that the current earnings season would break the cycle of stocks all moving in the same direction and allow companies to trade on their individual merits.

They're still waiting.

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Nine S&P 500 companies had earnings Monday and all but one (Hasbro ) were in the red.

Across the spectrum—from Wells Fargo to Halliburton—companies that reported earnings Monday were falling, just like the rest of the benchmark.

Inside the index, about 450 stocks were down. This is what Bespoke Investment Group calls an “All or Nothing” day: when more than 400 stocks in the index are moving in the same direction as the benchmark itself.

Theories vary among the cause of this phenomenon, with investors citing everything from the Euro crisisto the proliferation of exchange-traded funds . But almost all agree that if even earnings can’t break this vicious cycle, stock pickers may be forced to join the protesters down on Wall Street.

“For the last several years, the macro stories have become bigger and bigger and have tended to outweigh the individual stories,” said James Iuorio, a trader with TJM Institutional Services. “Also, there has been less participation from individual investors as the memory of the past losses remain fresh. The resulting thin markets tend to have greater and more volatile swings.”

If this pace continues, 2011 will have 61 of these “All or Nothing” days, the most on record, surpassing even the many gloomy days of 2008 when everything seemed to move in unison to the downside.

Even during the booming times of the late 1990s, money managers concentrated in the right areas (Internet) won as those stocks moved higher while others in the index did not. And when that bubble popped, those very same money managers lost.

But during this bull market and subsequent pullbacks, everything seems to move together. A Goldman Sachs report last month put the three-month trailing correlation of returns among the S&P 500 constituents at a record 0.75, three standard deviations above the 10-year average.

“I view it as the price representation of massive global uncertainty and hyper oscillation between market dominance of risk on and risk off,” said Phil Pearlman, executive editor of in a note on that twitter trading community. “It’s great for experienced day and swing traders who have a handle on the weekly chop. Otherwise, taking less risk continues to be wise.”

In less than three months, the S&P 500 has had 12 moves of 7 percent or more over a period of days, according to Pearlman. “This is not normal,” he added.

Key examples Monday were Wells Fargo, which reported earnings Monday, and Apple , with results out Tuesday. Both were higher as the trading day began, but soon succumbed to the overall drop in the index.

“The first response of troubled economies remains to add liquidity,” said TJM’s Iuorio. “This liquidity has a tendency to seek a home and as it moves toward equities it tends to do so with a reckless attitude and looks less at individual fundamentals.”

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