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Wednesday: Stocks Ignore Data; Goldman a Better Indicator?

Stocks have sidestepped signs the economic recovery may be sputtering and that could continue.

New York Stock Exchange (NYSE)
Oliver P. Quilla for CNBC.com
New York Stock Exchange (NYSE)

The next update on the economy comes in Wednesday's economic reports. ADP releases its private sector employment report at 8:15 a.m., and the ISM nonmanufacturing survey is released at 10 a.m. That should include some important clues as to service sector employment. The Fed's beige book on the economy is released at 2 p.m.

Economists would not be surprised if those reports are weaker than they first anticipated, and the market is becoming primed for softer numbers. In fact, recent economic reports prompted J.P. Morgan Chase Tuesday to cut its expectations for first quarter growth to 2.5 percent from 3 percent.

"Things go up. Things go down. There are many cycles within the bigger cycle. I don't think what we're seeing is the beginning of something nefarious," said Michael Feroli, an economist with J.P. Morgan. Feroli said there was renewed weakness in January, and February should see economic impact from the series of winter storms on the east coast. So far, J.P. Morgan is not adjusting its second quarter forecast.

The disappointing economic data, plus concerns about European sovereign debt, has divided Wall Street into two camps. There are those who believe the market will continue to move higher, despite the temporary economic setbacks. Then there are others who don't buy that argument, and see the spotty reports in housing, consumer confidence and jobless claims as an indication of a bigger problem that will ultimately impact the stock market.

Jack Ablin, chief investment officer of Harris Private Bank, is in the first camp. He is more cautious than he was last spring when momentum looked set to push stocks sharply higher, but he still sees stocks as a place to be.

For now, equities valuations are pretty good, with price to sales and price to book "reasonable at worst." He also said credit markets are functioning well, and that's a plus for stocks.

"Here's the reason we're in the market. You have to buy into the premise that we're in a secular, sideways market that's not going anywhere, and in an environment like that historically we've found momentum is a really fantastic indicator. That's one of the factors we use anyway, but now it's one that we're putting almost center stage," he said.

But several months from now, things may be different. "Momentum is starting to slow. We've got economic tail winds that will eventually shift and turn into head winds. We see it coming. State and local taxes are going to go up," he said.

Ablin said though that he expects U.S. stocks to outperform other equities markets for now. For instance, U.S. large caps are a way to play emerging markets, and may perform better.

"The fact is the valuation in emerging market stocks is higher on a nominal basis than the S and P 500. That's happened three times in the last 20 years, and each time emerging markets have underperformed" he said. Those occurrences were in 1993, 2007 and 2008.

Foreign developed markets may also become less attractive, and if he sees them breaking down, he plans to switch those funds to U.S. equities. He said the MSCI EAFE index EFA etf is currently slightly above its 200-day moving average. Should it fall 5 percent below the moving average, he would sell.

Whither Stocks

In some ways, Goldman Sachs is a bell whether for the financials and the market as a whole. So it was interesting to see Rochdale analyst Dick Bove take his knife to the firm's first quarter earnings estimates Tuesday.

Bove did not do it because Goldman Sachs has come under fire for its role in the financial crisis or the recent criticism it has been taking for helping Greece circumvent the EU rules on debt thresholds.

Bove did it for the same reason the Dow crept just 2 points higher Tuesday, and the CBOE's VIX volatility index continues to slide day after day. It's the lack of volume on Wall Street. Market volume in February was roughly 8 percent below January's levels.

"Essentially when the quarter started, the first two weeks of the quarter saw this almost blast of trading on the upside, and it looked as if this is going to a very strong quarter for Goldman Sachs and other companies in this sector," said Bove on "Fast Money."

"All of a sudden, when the Greece situation developed toward the end of January and there were statements being made by the president that were not conducive to trading, then basically what happened was trading dried up. Sector by sector you saw a significant decline in trading activity and as a result of that, all of the... optimistic forecasts that we had at the beginning of the year had to go away," he said. Bove said other firms, including CSFB, confirmed this story.

He trimmed Goldman Sachs first quarter earnings forecast to $3.99 per share from $4.88.

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