Will The US Stock Market Be Disappointed By Key Earnings Reports Next Week?

Michael Santoli has written a perceptive article for Barron’s that caught my eye:
http://online.barrons.com/article/SB124847531187980227.html?ru=yahoo#mod…

As dramatic as the two-week lift has felt to those involved, the Dow is just a smidge above early-June levels and about where it was the first week of January. And in truth, it has mostly been dragged higher, in laggard fashion, by a global rotation back toward risk assets.

The profound skepticism that met the first phase of the rally from the March lows has diminished, without yet having overshot to wanton bullishness. Plenty of professional investors who have been including wishes for a 10% pullback in their bedside prayers have buckled and become grudging, not raging bulls.

On Friday, the tape deftly absorbed the clanging disappointments by Microsoft (MSFT) and Amazon.com (AMZN), which arrived upon an overbought market minutes following a ringing rally Thursday. Those results were an excuse to panic that was ignored for at least a day.

That said, it’s not uncommon for earnings season to play out in two offsetting phases, with the first half (just completed) resetting expectations in a way that leads to them to being upended in the back half.

One thing that favors the (admittedly consensus) view that any pullbacks won’t likely be deep in the short term is that conditions are much different than they were when the Dow was last here in early January, just ahead of its second waterfall collapse in four months.

Then, credit markets were less fully functioning than they are today; the bullish case rested on hope for successful bailouts, versus today’s focus on fundamentals; and a frenzy of downward earnings revisions lay ahead, whereas we now see they fell in recent months to easily beatable levels.

‘Risk assets’ refers to the reflation play, i.e., the extra liquidity (money printing) that the Fed has pumped into the financial system that has found its way into the commodity price sensitive sectors of the market (i.e., energy, basic materials, and capital goods industrials and transports).

What he is saying though is that the first big week of earnings reports were mostly positive until Friday, and after Microsoft (MSFT -8.26%) and Amazon (AMZN -7.86%) disappointed, the marketplace generally chose to ignore it, waiting for the second week’s reports. It’s usually the second week where reality tugs away at the optimism generated by Wall Street in the first week. If there are more duds like MSFT and AMZN, this market is headed south.

http://billcara2.com/tkchart/tkchart.asp?stkname=MSFT,AMZN&prt=0&wt=0

Yes, as Santoli opines, the earnings expectations set by Wall Street are easily beatable, which means that if they are not beaten, there’s going to be trouble ahead. He also points out that credit market conditions have improved; however, there is much evidence, e.g., CIT, that conditions have gone from zero to maybe 5 on a scale of 100 where 50 is required for a healthy economy.

So, we are still focused on earnings. We need to analyze the reports and guidance thoroughly, and then we need to assess the marketplace reaction to disappointments. That will tell us whether the ‘grudging bulls’ continue to buy into the program or exit, leading to another ‘waterfall collapse’.

This would be a good time to drop your skepticism and pre-conceived notions and simply watch the price and volume action. Let the market speak.

In one case, it has already spoken. The stock of Microsoft, the world’s biggest technology company, the basis of so much embedded technologies and related enterprises, and a key component of the DJIA index, was down -3.5% this week, a week where the DJIA was up +4.0%, and down -1.4% from a month ago, a month where the DJIA was up +7.7%.

http://billcara2.com/tkchart/tkchart.asp?stkname=MSFT,AMZN&prt=0&wt=1
http://billcara2.com/tkchart/tkchart.asp?stkname=MSFT,AMZN&prt=0&wt=3

Meanwhile the Daily RSI-7 for the DJIA is 83.8, back to where it was in June 2007, at the height of the 2002-2007 Bull market. Meanwhile, MSFT, which ran to 90+ then back to 30 for the Daily RSI-7 before running to the mid 80’s, started plummeting on Friday as the price crashed, with the value at 41.4 at the close.

Should other key earnings reports be just as disappointing next week, the price and Daily RSI-7 of the DJIA may follow the MSFT lead. Just a thought as you ponder the possibilities for next week. This is not a forecast; just a heads-up that reported earnings and guidance is still the key focus as we move forward.

Subscribe by RSS Subscribe by Email