Dow 13,000? Get Ready for the Pullback
02/21/12 - 12:11 PM EST
NEW YORK (TheStreet
) -- Analysts aren't sure when the Dow Jones Industrial Average
will close above 13,000. They're far more certain of the pullback to follow shortly thereafter.
Market participants are likely take some profits when the index reaches this psychological level. The last time the index closed above 13,000 was in May of 2008. Analysts have been speculating since January that equities are due to cool off after a steep run up this year. The 13,000 level might provide a key opportunity for investors to take money off the table.
As of about 11:25 p.m. ET, the index peaked above 13,000. But, it was wasn't barreling toward the level in anyway. Already, corporate news is keeping a cap on the index's gains. In particular, a 4% loss in Wal-Mart (WMT)
shares after the retailer missed earnings expectations this morning was keeping the Dow from inching higher.
The buzz around corporate earnings is likely only to grow more negative, which will undoubtedly put dampers on overall market sentiment. According to S&P Capital IQ, the S&P 500's double digit growth streak of eight quarters is now in jeopardy. "The last time this happened was in [the third quarter of 2009] when the S&P 500 declined 1.62% from the previous year." Analysts are keeping a close watch on less than 20% companies on the S&P index still to report fourth quarter results.
Meanwhile, first quarter earnings aren't looking good either. About one-fifth of companies decided to provide guidance this earnings season, versus the usual one-third of companies giving forecasts, according to S&P Capital IQ. Companies are reluctant to call their futures given uncertain growth rates in emerging markets and unpredictable raw material costs.
Paul Nolte notes that stocks overall have gained more than 15% since early October 2011. "There is room on the upside, and maybe another month or two to go," he writes in a recent research note. "But instead of looking to squeeze additional gains, it may make more sense to be looking for a door."
Furthermore, the consensus reaction to the Greek debt deal on Tuesday seems to be that European leaders have only bought more time before the struggling country skids close to a default again. The Dow, which sold off a bit on news of the deal earlier in the morning before climbing just 50 or so points, seems to agree.
Private creditors need to "voluntarily" accept the more than 50% haircut to their bond holdings once Greece launches its debt swap. Barclays Capital has a taste of what could go wrong as the country tries to implement its very tricky bailout deal:
"If the [private sector involvement] participation rate is not high enough, Greece is likely to apply retroactive collective action clauses (CACs), which could lead to a credit event. Furthermore, there is the potential for early elections (possibly in April) and the parties that do not support the program are gaining traction. The package also requires parliamentary approval in Austria, Finland, Germany, Netherlands and Slovenia."
Technical analysis also supports a near-term pullback on the Dow. Market watchers note that the Dow Jones Transports, a cyclical index that has often been a leading indicator for the broader market, is rolling over. "While the Dow Jones Industrial Average has exceeded its 2011 high, the Dow Jones Transports, at their recent closing high, was about 4% below its 2011 peak," writes Mark Arbeter, S&P Capital IQ's technical strategist. "This non-confirmation by the transports is a bit worrisome and cause for some caution."
All this is to say the blue chip index isn't barreling toward its all-time high of 14,164 anytime soon.
-- Written by Chao Deng in New York.
>To contact the writer of this article, click here: Chao Deng
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