October 26, 2012 at 01:53 AM EDT
Stock Market Bounce? The Price of Oil Says No

There are very few stocks accelerating in this market; the vast majority of stocks have pulled back from their recent highs. We may yet get another period of stock market upside—another kick at the can before a meaningful correction. This market is due for a correction, and with revenue and earnings expectations coming down, it would be a natural development right after third-quarter earnings season comes to a close.

There’s been some very good price pops among blue chips; a recent standout is Johnson & Johnson (NYSE/JNJ), which surprised the stock market with its earnings. The stock spiked over four points on the news and has done well since June. Johnson & Johnson’s stock chart is below:

                                   

Chart courtesy of www.StockCharts.com

 

But there’s been a meaningful breakdown in a lot of stocks, especially those with significant international operations, not surprisingly. We’ve had weak stock market performances (and earnings) from companies like NIKE, Inc. (NYSE/NKE) and McDonalds Corporation (NYSE/MCD), which were former stock market leaders until May of this year.

PepsiCo, Inc. (NYSE/PEP) is a benchmark stock that I always follow. This company is fairly priced and boasts a current dividend yield of 3.1%; but the stock has been breaking down since late August and remains in a clear downtrend. PepsiCo’s stock chart is featured below:

                                     Chart courtesy of www.StockCharts.com

 

The Coco-Cola Company (NYSE/KO) is performing similarly, along with many other brand-name consumer stocks. (See “What Makes Dividend Increases Market-moving News.”) With so many blue chips well below their recent highs, I don’t see the stock market producing a meaningful advance until these positions turn around. Third-quarter earnings were mediocre and third-quarter revenues were worse.

So while we might get some near-term upside due to some more positive economic news, the stock market is signaling a correction, and investors shouldn’t be considering new positions. I’d like to see a meaningful correction in the main stock market indices before I consider buying. Corporate earnings aren’t really expected to grow next quarter. Mind you, so many individual investors aren’t participating in this market anyway because the headwinds are very obvious.

The spot price of oil continues to be one of the best near-term gauges on investor sentiment. At $88.00 a barrel for West Texas Intermediate (WTI), it isn’t saying much.

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