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Are Stocks Ready to Give Back Some of 2012's Gains?

The debate about whether stocks are ripe for a pullback will be as much a focus as anything else Tuesday, as investors watch some fresh U.S. economic data and await the next drama out of Europe.

Businessman with crystal ball
Fredrik Skold | The Image Bank | Getty Images
Businessman with crystal ball

Moody’s one notch downgrade Monday evening of Italy and Portugal and two-notch cut of Spain weighed on the euro after the U.S. market close. Moody’s also put the U.K. and France on credit watch negative, among other actions. Meanwhile, investors await the meeting of euro zone finance ministers Wednesday where they will consider Greece’s austerity package, approved by its Parliament this past weekend.

Whither Stocks?

As many commentators have pointed recently to a high level of bullish sentiment, traders have been focusing on the low 1,350s area on the S&P 500, to see if the market can meaningfully close above it and move higher. The next important area after that would be 1,370, the high for last year. On Monday, the S&P rose 9 to 1,351, while the Dow continued to head towards a psychologically important milestone of 13,000. The Dow finished up 72 at 12,874.

“I think that the market’s due for some sort of a pause/and or pullback here,” said Jeffrey Saut, chief investment strategist at Raymond James. “The S&P is a couple of standard deviations above its 50-day moving average, and you’ve got some seasonality here that’s a little questionable.” February is typically a weak month for stocks and so far this year , the S&P is up 3 percent for the month and 7.5 percent year-to- date.

Saut also said another negative sign for stocks was a report last week showed a big jump in short positions by hedge funds. “The smart money is short $7.4 billion versus various indices as of last Tuesday… That was up from a previous $2.7 billion. That’s one of the largest weekly jumps I’ve ever seen, and it’s the highest short position by the commercial hedges since 2002.”

Another point of concern is that the move in the Dow has not been confirmed by the Dow Transports, which would have been a bullish sign, said Saut. “I think it would be a mistake to get bearish here but I could see a pause, or a little bit of a pullback, but I don’t think it would be anything great because the whole world is underinvested in U.S. equities,” he said.

Trim Tabs reports that corporate stock buybacks during this past earnings season averaged $1.7 billion a day, the lowest level in an earning season since October, November, 2010. “The slowdown in buybacks is worrisome because our research shows buyback volume is highly correlated with stock prices. In addition, corporate insiders have become huge net sellers of shares as earnings seasons blackouts have lifted,” Trim Tabs noted. It also pointed out that the insiders have sold $2.3 billion in February, 15.5 times the $145 million they have bought.

However, Jeffrey Kleintop, chief market strategist at LPL Financial, points out, in a note ,that one positive is that the worst earnings season in years actually still beat some diminished expectations. Earnings growth was about 8 percent for the fourth quarter. Kleintop said a positive is also that companies are spending some of their cash on dividend increases.

“Investors had priced into the stock market a decline in earnings in 2012 (valuations started the year in line with where they were last at the end of 1990, during a recession when earnings fell 20 percent over the following six months) and are now realizing that earnings are instead likely to post modest growth in 2012,” he wrote. Analysts’ earnings expectations for the year are now at 8 percent, revised down from 13 percent at the end of last year.

U.S. data Tuesday includes retail sales and import prices at 8:30 a.m. and business inventories at 10 a.m. The NFIB small business survey is released at 7:30 a.m. There are also a few earnings reports, including Avon Products, MarshandMcLennan, TransCanada, Goodyear Tire, and Zipcar ahead of the opening bell. Metlife, Zynga and Weight Watchers report after the market close.

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Oil Drill

A technical glitch at NYMEX shut down electronic energy trading for about an hour, resulting in Nymex canceling all traders that were in progress. The shutdown sent trades to the open outcry pits, which normally does about 5 percent of volume.

“You saw a little panic buying in Brent crude because people were trying to hedge themselves,” said John Kilduff of Again Capital. Brent crude, a reflection of international oil prices, trades on ICE. West Texas Intermediate trades on Nymex. The outage affected crude, heating oil and gasoline.

WTI crossed the important $100 threshold and finished at $100.91, up more than 2 percent on the day, on the positive view that Greece would get its aid package but also on concerns that Iran was behind attacks on Israeli diplomats' cars in Georgia and India.

What Else to Watch

President Obama meets with Chinese Vice President Xi Jinping, expected to be China’s next president. Xi visits Washington Tuesday and the Midwest and California later in the week.

Philadelphia Fed President Charles Plosser speaks at 8:45 a.m. on the economic forecast, and Atlanta Fed President Dennis Lockhart speaks at 5:40 p.m. on the economic outlook.

Treasury Secretary Tim Geithner speaks at 10 a.m. EST on the budget, introduced by President Obama Monday.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

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