Trader Talk

Sectors to watch as market weakness spreads

Traders work on the floor of the New York Stock Exchange.
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Stocks have been drifting lower since early morning in response to disappointing earnings reports, particularly from large multinationals like Caterpillar and 3M.

Other multinationals this week—including United Technologies and Emerson Electric have highlighted similar problems. They can be lumped into two groups:

1) Slowing economies: China, Latin America

2) dollar strength

The slowing economies are leading to declines in commodity prices and a slowdown in capital spending.

No surprise multinational are feeling the pain:

Multinationals this month

United Tech down 9.1%

Caterpillar down 9.0%

Emerson Electric down 6.7%

MMM down 2.6%

Caterpillar reflects all of the concerns. They are seeing declines in their commodity business (mining), in their oil business, and in construction (China):

Caterpillar divisions

(Q2 revenues year-over-year)

Resource: down 12% (mining)

Energy/Transportation: down 12% (oil)

Construction: down 18% (China)

The downbeat commentary is taking some analysts by surprise. For example, 19 of 21 analysts who cover Emerson Electric lowered their full year estimates in the last month.

Sixteen analysts who cover United Technologies—almost the entire universe of analysts who cover the stock—have dropped their full year earnings outlook for the year this month, most in the last couple days.

The weakness is not just in China—Whirlpool and Caterpillar both mentioned lower sales in Latin America.

The largest of the Latin America ETFs, the iShares Brazil ETF, is seeing very heavy volume today and is poised to break through a 6-year low.

Watch for any signs that this is spreading past the commodity and industrial names. For example, food giant Unilever (Ben & Jerry's ice cream, Knorr stock cubes, Hellmann's mayonnaise, etc.) said consumer demand was weak, with what it called "negligible" growth in Europe and North America. Sales were flat in the second quarter.

The main concern of the trading community right now is, how long will the stalwarts remain the stalwarts?

There is a LOT of money hiding out in a small group of stocks: 1) banks, 2) healthcare (most biotech), and 3) tech/internet, particularly the "Big Four" of Apple, Facebook , Google, and Amazon.

That's why all eyes are on several key ETFs: Banks , Biotech, and the NASDAQ 100. Despite some tech weakness at the end of the first quarter, none of them are showing signs of cracking, yet.