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Despite problems, trend followers are happy

A trader works on the floor of the New York Stock Exchange.
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A trader works on the floor of the New York Stock Exchange.

Trend followers are happy, despite plenty of problems.

Lousy weather in the Midwest and Northeast, a port slowdown in California, a cease-fire that never was in Ukraine and protracted negotiating difficulties between Greece and the European Union.

You'd never think it, but despite these problems we are at new highs on big caps (S&P 500), midcaps (S&P Midcap) and small caps (Russell 2000). Even the broadest measure of the market—the Wilshire 5000—set a record on Friday.

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Following relative strength is a time-honored tradition on Wall Street, but as the fundamentals have gotten more confusing since the financial crisis many more have turned to technical analysis to try to figure out when to get in and out of the market.

Piper Jaffray wrote, "The wait for a directional move seems to be over," noting not just new highs in the major indexes but also the recent improvement in breadth.

Even Europe is looking better. The Europe STOXX 600, a basket of the 600 largest stocks traded on the major exchanges of 18 European countries, is sitting near its highest levels since 2007.

I have no problem with trend following, as long as there is something fundamental behind it. But I have been troubled by the trend in earnings for several months, and it is spilling over into Q1 2015 from Q4 2014.

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Specifically, first-quarter estimates are also coming down fast. According to FactSet, analysts dropped earnings estimates for the S&P 500 by 7.4 percent in the first half of the quarter (the first six weeks of this year). This is far larger than the average decline in the first half of the quarter in the last four quarters, which has been 2.3 percent.

In fact, it's the largest percentage decrease for the first half of a quarter since the second quarter of 2009, when it was down 7.5 percent.

That's worrisome. Fourth-quarter earnings have turned around after dramatic declines from energy, but are still lower than anticipated. Are we starting a trend?

Elsewhere:

1) Oil driller Transocean has proposed cutting is dividend 80 percent, to 60 cents a share from $3. That measure will come up for a vote at its annual meeting in May.

The company's goal, it says, is to maintain an investment-grade credit rating.

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Some will certainly question why the company is so committed to keeping its investment-grade rating at the expense of dividends. That's not hard to figure out: it is critical for it to be able to borrow money relatively cheaply. That includes borrowing money to pay the dividend!

It's also no great shock: the old dividend had a yield of almost 16 percent; even at a 60 cents per share annual dividend, the yield is still roughly 3 percent.

The average dividend yield for energy stocks is about 3 percent; any time you go above, say, 5 percent, people start to get suspicious that the dividend yield is too high.

It certainly should help with Transocean's objective: saving $2.40 per share in dividends for 362 million shares outstanding means roughly $868 million in dividend payments each year that will not be paid out, which should go a long way toward paying down its $10 billion in debt.

CEO Steve Newman is also leaving.

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2) The Chinese New Year celebrations start this week. The Chinese market will be closed starting tomorrow for a week.

3) More success for currency hedging: The WisdomTree Europe Hedged Equity ETF has passed $10 billion in assets, another win for currency hedging. Its rival, the Vanguard FTSE Europe ETF, which is not currency hedged, has $11.8 billion in assets. WisdomTree's Japan Hedged Equity ETF has more than $13 billion in assets.

  • 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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