Merger mania, economic data & earnings onslaught hitting market this week

Jeff Macke

Investors still trying to figure out what happened to their portfolios last Friday aren't likely to find the answers this morning. Pfizer's (PFE) making a roughly $100 billion bid for AstraZeneca (AZN), highlighting the escalation in mergers and acquisition activity. Standing in contrast to that increasingly isolated bullish premise is the 1.6% drop in the Shanghai Composite, adding to a 2.9% drop last week.

Those who came in to today expected a crash are frustrated and those leaning heavily long aren’t profiting much relative to their risk taken. The S&P500 (^GSPC) stands less than 1% higher for the year yet only 2% below all-time highs. Those who say buy the dip have to first understand that there has yet to be much of a sustained pullback but rather a series of sharp pivots.

Phil Pearlman makes the argument that stocks are doing what they can to frustrate the largest possible group of investors. At times, markets frustrate the majority of participants and this environment is precisely such a time. Equities have been sawtoothing as the S&P 500 has alternated between higher and lower weekly closes for 8 consecutive weeks. This is miserable for traders who were successful in 2013 by jumping into strength and that have not adapted.

Over one-fourth of the S&P 500 reports over the next 5 days. Pearlman is watching the conservative blue chips like Exxon (XOM) for a tell as to how willing investors are to keep hiding in companies they think are stable as an alternative to playing the higher volatility stocks that have been driving the S&P’s 18% return over the last year.

Traders are more than likely to focus on the weakness in all things momentum after another bloodbath in Nasdaq stocks on Friday. A 9.9% drop in Amazon (AMZN) and more selling in the now-popped Social Media bubble erased a week's worth of gains. Yelp (YELP), LinkedIn (LNKD) and other former market darlings report this week leading off with Twitter (TWTR) tomorrow. It’s still a relatively meaningless company in terms of size but Twitter shares have been the epicenter of the valuation debate, having been cut more than ⅓ from their highs. Last time the company reported, Twitter fell 25% on the realization that tweeting wasn’t going to take over the world. Whether or not Wall Street has priced that in fully or not will be seen on Wednesday morning when it starts trading.

Finally there’s real economic news in the form of GDP and Non-Farms payroll at the end of the week. GDP estimates are a mere 1 - 1.2%, depending on where you look. Suffice it to say the estimates have been dropping fast. Non-Farm Payrolls are expected to come in at 210,000 compared to 192,000 last month.

As for the morning at hand, Pearlman thinks the Street is in sell the rips mode, suggesting a long, gross summer is at hand. If the market can get through the next five days unharmed, the path of maximum pain will be higher, but that’s a HUGE if.

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