Home on the Range - 01/26/10

Better hitch your wagons and pitch your tents, it looks like we're bound to weather the storm here for a while.

"There is a glaring upside to first-quarter 2010 corporate profits (up 100% year over year) and first-quarter 2010 GDP (up 4.5%). It grows clear that, owing to continued draconian cost cuts, coupled with a series of positive economic releases and a long list of company profit guidance increases in mid to late January and early February, there is a very large upside to first-quarter GDP (up 4.5%) and, even more important, to S&P profit growth (which doubles!). The upside on both counts is in sharp contrast to more muted growth expectations. While corporate managers, economists and strategists raise earnings per share, full-year growth and S&P target estimates, surprisingly, the U.S. equity market fails to respond positively to the much better growth dynamic, and the S&P 500 remains tightly range-bound (between 1,050 and 1,150) into spring 2010."

-- Doug Kass, "20 Surprises for 2010" (surprise No. 1)

The equity markets are behaving in precisely the manner we anticipated. As contrasted to most strategists, who anticipated a continued recovery in stock prices in January, our No. 1 surprise in late December was that stocks would make little upside movement even in the face of improved fourth-quarter 2009 results and better guidance for first quarter 2010.

Taking into account the weakness in S&P 500 futures, the January (and year-to-date) S&P 500 return is now a bit worse than down 2%.

As mentioned in yesterday's opening missive, I continue to expect a range-bound market over the next several months, with a slightly negative bias. This will be an ideal backdrop for opportunistic traders and sellers of premium but a not-so-hot setting for investors.

I would color the outlook as indecisive and boring, as the tug of war between strong current earnings reports clashes with a number of nontraditional headwinds that make it different this time.