Oversold bounce

We are getting an oversold bounce today. It is being led by the commodity sector which had been beaten down the hardest over the last 2 weeks. At this stage I don’t think this is the start of new leg up in the market.

Unlike what we saw in the 2008-2010 period, sell offs in the markets are probably going to progress slower as the financial system is in better shape now. That is why you don’t see huge sell offs in the market on European issues anymore. So even if we get a 10% correction over the summer it will be in fits and starts, rather than one quick move down.

Data from Bespoke Investment group shows that this was not a great earnings season. Companies are having a harder time beating estimates, only 59.5% beat estimates compared to around a 65% beat rate for the last few quarters . US companies have achieved record profit margins in this recovery but I think they will have a very hard time increasing profits from cost cutting anymore.  I think earnings growth will really slow down going forward. Therefore the only way I think we will get any meaningful move up(10%+) in the market is if investors are willing to pay more for the same stream of earnings(Another way to put it is investors perceive less risk). With QE2 ending and more fiscal austerity coming down the road, I don’t think investors will perceive less risk. Therefore I see a soft summer period for the market. I think short term traders should look to position themselves short on rallies and long term holders should reduce risk by trimming holdings or moving into defensive sectors.

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