10/10/12 4:29 PM – Market Pullback on Lower Earnings

The market is down the last 4 trading days starting with Friday on earnings announcements that have been mediocre. This is earnings season and it was expected to be the first one since 2009 that saw lower profits overall. But, announcements have been a little lower than expected.

Little wonder. Businesses have lowered expenses about as much as they can and growth is slowing around the world, including in the U.S.

That’s not to say that profitability is not at a high level. Profits are close to record levels but the trend this quarter is down and investors worry that subsequent quarters may be not great.

There are only 3 ways the market goes up. Either earnings are going up, earnings are expected to go up or investors are willing to pay more for earnings. A & B are false, which leaves C. As the world slows, I doubt investors will be willing to pay more unless they see better economic news. The only things better there are the unemployment rate, which is highly suspect, and a pickup in housing prices and construction.

So, it is possible that the market may have peaked for now and if not, at least has hit a “soft patch” i.e. a time for a pullback in prices or flat prices. Even the darlings like Apple have been coming down so I look for more of the same, though not in an unbroken line. There are support levels that often trigger bounces.