Edging Up Before Earnings

As investors adjust their expectations, buyers also should take note that earnings season has yielded fewer gains in the past four years' bull market than the off-season, according to Birinyi Associates. The earnings off-season has provided 55.4% of the gains in the bull market since October 2002, while earnings season provides only 13%, according to the research firm.

For aluminum producer Alcoa, the fourth quarter was not likely weak, but then again, expectations may be too high. Thomson reports the consensus expects 86% earnings growth for the company in the fourth quarter and a 14% rise in revenue. Shares of Alcoa slipped 1% Monday.

More broadly, high expectations for the 2007 stock market have taken hold in the mainstream, and that is worrisome, writes John Roque, senior technical analyst at Natexis Bleichroeder. Roque compiled a list of headlines from late December and early January, which includes the all-caps USA Today headline: "10 REASONS WHY THE S&P COULD HIT A RECORD HIGH," and "No Retreat; How The Bulls Stole Wall Street" in The Wall Street Journal.

"So, with sentiment having shifted, at least according to the above headlines, we believe a more cautious outlook for stocks and equity markets is warranted," he writes.

Roque adds that several technical factors support his caution. New lows on the NYSE are increasing as new highs decline, and the last three times this indicator showed such a pattern, the S&P 500 lost 7.6% from March to April 2005; 6.24% from August to mid-Oct 2005; and 8.3% from May to mid-June 2006, he writes. A similar correction now puts the S&P 500 down in the 1326 area, or a 6.2% correction from current levels. Roque notes that NYSE cumulative volume is starting to turn down, as is the percentage of stocks trading above their 200-day moving averages. Such technical indicators often signal the start of a corrective phase.