@theMarket: GE Knocks the Market Out of the Box

By Bill Schmick - April 12, 2008
iBerkshires Columnist

Bill Schmick

The bulls sure know how to take a beating. The quarterly earnings season began this week with a litany of bad news. First, Alcoa, then Advanced Micro and finally General Electric took turns announcing lower earnings and even lower future guidance. 

It took the wind out of the market on a daily basis but rather than fall out of bed, the averages remained firmly in a trading range — until Friday.

GE did not bring good news to you or me this week. The conglomerate, which is involved in everything from health care to media, industry and finance, is the second largest company after Exxon in market capitalization. So the market pays attention when GE misses earnings as it did for the first time in eight years Friday morning. 

It is really a big deal because many investors believe GE is a barometer for the economy and the market. Imagine the disappointment when management announced they missed their first quarter earnings number by 4 cents a share. They pinned most of that miss on their finance division. The markets promptly fell by more than 1 percent each and kept going closing down over 2 percent or more for the day.

My argument that the S&P 500 is still in a trading range with the lower end at 1270 and the upper end around 1400 holds true. But even counting today's losses, we have traded in a smaller trading range this week then we've experienced so far this year. Today was the first 250-plus-down day on the Dow in two weeks and days like today are neither good for stock prices nor my blood pressure.

We also saw a drop in commodities as well as the dollar. Investors concluded that if GE sees bad times ahead, then the economy must be in really bad shape. In which case, there will be less demand for commodities. Whether GE was the catalyst or an excuse is immaterial. Investors just couldn't muster the resolve to continue purchasing stock.

I believe much of the recent buying support was coming from IRA and other tax-deferred contributions that usually pour into the market in the first quarter. Money managers invest that money as it comes in so it provides a steady stream of cash and a floor of support for the market. Of course, that support should dry up soon. In a few short weeks we will also be facing the dreaded month of May, when many investors usually sell and go away for the summer. There is more meat to that myth then many might think.    

As for commodities, for the week they were up 3 percent overall, lead by energy while the stock markets were down over 2 percent. I believe that, like the stock market, commodities will stay trapped in a range for a bit longer until something gives — the dollar, inflation, economic numbers — something that drive prices one way or another.

We've given back most of the gains acquired on April Fool's Day so patience has won out for yet another week. I know I sound like a broken record but it's not time to add money to the market. That's not to say we won't turnaround again next week, confound the shorts and move higher. The point is that the pattern continues to repeat itself as it should in a bottoming process.

During the dot-com debacle it took nine months from October 2002 to April of 2003 before the S&P 500 finally saw some blue sky. This one could easily last into the summer.

Bill Schmick is a licensed investment adviser representative and portfolio strategist with Berkshire-based Dion Money Management, managing over $800 million for middle-class Americans from coast to coast. Direct your inquiries to Bill at 1-877-850-7942, Ext. 146, (toll free) or e-mail him at wschmick@dionmm.com. You can also visit www.afewdollarsmore.com for more of Bill's insight.