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The folks at Wells Fargo Securities published a note this morning wondering if stocks are poised for a “February flop”?
It’s a great question, especially considered the sharp run-up the market has experienced in the first month of the year. If history is any guide, February is typically a month for taking profits. A near-term pullback wouldn’t shock most market observers.
That said, there are several themes expected to play out over the next several months that aren’t some comforting for the bulls. The surprise element of better-than-expected economic data may begin to lose its luster in the near future. Here’s Wells Fargo’s take:
As the November-January seasonal boost fades into February, and economic expectations become harder to beat, the path for stocks may get significantly more difficult to navigate in coming weeks. We suspect stocks are due for a near-term correction, driven by economic data and worsening seasonal supports. Earnings will offer little comfort in the near term, in our view.
There’s no denying the economy as a whole have been improving in recent months. But many of the economic figures we love to monitor, i.e. jobless claims, manufacturing data, retail sales, have all beaten relatively low expectations.
As economists start raising the bar and expecting more from the economy, it will be tougher to exceed those expectations. Again, from Wells Fargo:
Day-to-day economic releases may move from market tailwind to market headwind in coming weeks, as higher expectations become tougher to beat. Economic surprises have been closely correlated to swings in stocks in recent years. The economic surprise index made a near-term peak in early January, as several indicators such as jobless claims, retail sales, and home sales have fallen short of consensus expectations for growth. The extent to which markets have celebrated economic surprises suggests to us that disappointments may be at least a touch depressing for stocks in the near term.
All in all, Wells Fargo expects 2012 may look a lot like 2011 as stocks could struggle for direction. “We suspect 2012 may be a year in which investors are persistently weighing the give and take of rolling economic surprises and halting earnings momentum, thereby resulting in fairly inconsistent price trends,” the firm said.
Wells Fargo isn’t the only firm that isn’t drinking the bullish kool-aid. The folks at TrimTabs said this morning they are “cautiously bearish” on stocks. Their “demand index,” which tracks fund flow and sentiment data, recently fell to a 28-month low.
The only positive indicator for stocks at the moment is buyback annoucnements surged to nearly $23 billion, which is the most in nine months, according to TrimTabs.
Even as stocks have languished over the last few trading days, the broad market is still sharply higher for the month. The big question is whether investors will use this opportunity to buy the dips or if more trouble is looming.
For money manager Barry Ritholtz, its’ way too early to make that call. “I prefer to see more evidence that the rally is over before changing portfolio weightings,” he says.
Dow industrials are down about 90 points, or 0.7%, to 12570 minutes after the opening bell. S&P 500 drops 12 points, or 0.9%, to 1304.
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Steven Russolillo spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com.
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