The quant studies are essentially all in agreement that we’re set to see a sizable pullback which will come of little surprise. This is in also inline with many commentators (like Art Cashin for example) who are expecting a pullback as earnings season begins. Yet, if we’ve learned anything since the February 5th lows, this market doesn’t generally like to act in a way that conforms with market expectations.
If the market does significantly pullback right now (say greater than 5%), Mr. Market will do something it doesn’t often do which is to reward the majority who see it coming and it would occur right on schedule. Whenever I see a trade that seems too easy, I expect to be disappointed. I think if the market doesn’t pullback right now it would be surprising to many. For the very same reason, if we can get through the initial reports without seeing a price pullback of some magnitude, that should enable the market to relax its guard and begin to think that we’re safe during earnings season as well. Ironically, it will also be at that same juncture that we’ll be the most vulnerable for that pullback.
So with that in mind, let’s see how the reaction to earnings unfolds this week. While we all know a pullback is coming, both the timing and magnitude of that pullback is still in question.
– Charles Kirk, “Awaiting An Earnings Season Pullback” (Subscription Required), April 13