(Updates column published Friday with context on Nasdaq's drop
in April, adds long/short ratio)
By Caroline Valetkevitch
NEW YORK, April 13 The wrenching selloff in U.S.
high-growth technology and biotech shares could leave investors
braced for more than a minor pullback when earnings pick up
speed this week.
First-quarter earnings estimates have fallen sharply as many
companies have blamed the brutal winter for weak outlooks.
With high-valuation stocks under pressure, earnings could be
subjected to even more investor scrutiny than usual.
"There's skepticism among investors about the outlook, and
we're getting into the first-quarter earnings season, so you're
going to see some positioning," said Brian Jacobsen, chief
portfolio strategist at Wells Fargo Funds Management in
Menomonee Falls, Wisconsin.
Profit growth for Standard & Poor's 500 companies now is
projected at just 0.9 percent in the first quarter from a year
ago, down from a Jan. 1 forecast for 6.5 percent growth, Thomson
Reuters data showed.
This week, 54 S&P 500 companies are scheduled to report
first-quarter earnings, compared with 29 last week.
Earnings are expected from such high-profile names as
General Electric, Johnson & Johnson, Goldman
Sachs, Google and IBM.
The economic calendar will include retail sales on Monday,
the Consumer Price Index on Tuesday, U.S. housing starts and
industrial output on Wednesday and the Federal Reserve Bank of
Philadelphia's business activity index on Thursday. The latest
weekly initial jobless claims will also come out on Thursday.
Wall Street will face this flurry of numbers during a
four-day week. The U.S. stock market will be closed for Good
Volume is likely to be lighter than usual with some
participants away for the observance of Passover, which will
begin at sundown on Monday.
BLUE CHIPS BACK IN STYLE
A move into blue chips is one trend emerging after the
market's slide, which pushed the Nasdaq down on Friday to close
below 4,000 for the first time since Feb. 3.
The Nasdaq Composite Index has fallen 4.7 percent
for April so far. That means the Nasdaq still has a way to go
before slipping into correction mode, which Wall Street defines
as a drop of 10 percent from a recent peak.
At Friday's close, the Dow Jones industrial average
was down 2.6 percent for April so far and the S&P 500 was
down 3 percent.
"You've seen small caps dominate," Jacobsen said, referring
to some of Wall Street's one-time darlings. "We're going to
begin to see large caps dominate now as people shift more from
these high-beta plays to quality."
Despite the selloff, investors are still pouring money into
Investors in U.S.-based funds put $8.9 billion into stock
funds in the week ended April 9, the biggest net inflows in four
weeks. At the same time, funds that mostly hold U.S. Treasuries
reported outflows for the first time in four weeks, according to
data from Thomson Reuters' Lipper service on Thursday.
Yet biotechs have been slammed. The Nasdaq biotechnology
index fell for the seventh straight week. The biotech
index is down about 21 percent from its record closing high on
Feb. 25. The last time it slid for seven straight weeks was in
the summer of 1998.
The price-to-earnings ratio on the Nasdaq biotech index is
34.4. The forward P/E ratio for the S&P 500 is 14.9, Thomson
Reuters data showed.
Data on sector exchange-traded funds also showed a big move
out of tech-related areas, with science and tech ETFs
registering outflows in the week ended April 9 after at least
five straight weeks of inflows. Healthcare and biotech ETFs also
showed outflows for the latest week, according to Lipper data.
High-growth companies, mostly in the tech and biotech
sectors, led 2013's rally, leaving them with some of the
market's highest valuations.
"Valuations are going to start becoming relevant again, at
least for a while," said Uri Landesman, president of Platinum
Partners in New York.
In another sign of a move toward less risk, Credit Suisse
data showed the long/short ratio among equity long/short hedge
funds declined to 46 percent, the lowest level since last fall.
TUNING IN TO THE FED
Part of what's behind the big momentum selloff may be
nervousness surrounding the Federal Reserve's December decision
to scale back its economic stimulus.
That's why all eyes will be on Fed Chair Janet Yellen when
she speaks on Wednesday to the Economic Club of New York.
"We've had basically five years of a market that's been
nannied by the Federal Reserve," which has driven up market
valuations, said Quincy Krosby, market strategist at Prudential
Financial, based in Newark, New Jersey.
"Now as we get closer and closer to the end of QE, I think
traders and hedge funds are being very careful and selective."
(Wall St Week Ahead runs every Sunday. Questions or comments
on this column can be emailed to:
(Reporting by Caroline Valetkevitch; Editing by Jan Paschal;
For the U.S. stock market report, click on )