We’re In A Hot Potato Market

The dirty little secret of the recent rally is that stocks are being driven higher by traders playing “hot potato.”

Yes, second-quarter earnings are much better than forecast. Through Friday, 76% of reporting S&P 500 members have topped expectations. However, this is more a case of analysts having been overly pessimistic than companies actually performing well. Reported revenues are running 10.6% below year-ago levels, on average.

The bullish argument against all this is that we’re in a recession and the markets are looking towards the future. Though this is true, the numbers aren’t painting a future that is very bright. Analysts cut their full-year forecasts on 59 of the companies that reported last week.

Furthermore, in some cases, even the positive revisions were not that positive. Take Caterpillar (CAT), for instance. The company topped second-quarter expectations by 51 cents, but the current consensus full-year forecast is only 38 cents higher than it was a week ago. In other words, analysts didn’t even raise their projections enough to simply factor in the full-extent of the second-quarter surprise. That’s not good.

This isn’t to say things aren’t going to improve. The economy should start to expand during the second-half of the year. However, the pace of growth will be slow and the recovery won’t feel like a recovery to many Americans.

There have also been some companies that have truly sparked analysts to raise their forecasts. A good example is Texas Instruments (TXN), where the company beat by 6 cents and full-year forecasts have been raised 15 cents. However, there has not been enough instances of this to move people off of the sidelines.

And the lack of volume is the biggest reason why I’m saying we’re in a hot potato market. Month-to-date, daily volume in PowerShares QQQ (QQQ) — the ETF that tracks the Nasdaq — has averaged 120.9 million. In April, daily volume averaged 142.4 million. Even if we look at just the past 2 weeks, volume is far below April levels.

None of this means that investors should stay away from stocks. Quite the contrary, the worst of the recession seems to be behind us. But it does mean investors should remain selective about which stocks they buy.

And don’t be swayed by the day-to-day moves in the markets. The fast money can shift directions much quicker than you can hit the “sell” button.

Subscribe by RSS Subscribe by Email