Why Losing Money at a Slower Rate Won't Do This Quarter

Last earnings season, the expectations were so low that companies could stumble over the hurdle and still move higher. If a company was expected to lose $1.50 per share and only lost $1.40 per share, the stock tended to rally on this news. Now that the books are closed on the second quarter and the S&P saw its largest quarterly gain in the last decade, with the index gaining 15.2% for the quarter.

That was then, this is now. After the huge rally from the lows in March, investors are not looking for companies to lose money at a slower rate, they are looking for actual improved earnings.

The traditional earnings season gets started on Wednesday, July 8, when Alcoa (AA) reports, but the reports really ramp up the following week when we hear from companies like Intel (INTC), Johnson & Johnson (JNJ), IBM (IBM), JPMorgan (JPM), GE (GE), Bank of America (BAC) and Citigroup (C).

Financial stocks buoyed the rally last quarter as they reported better than expected earnings, but this was on the back of TARP money and being able to sell bad assets to the government. A number of these companies have paid back their TARP money, but how will this affect the results this quarter?

Turning our attention to the chart, the 12-month moving average is looming just overhead and has held the rally in check so far. The rally in the second quarter looks very similar to the rally that occurred following the attacks of September 11, 2001. The market’s initial sell off after the market reopened was countered by a sharp rally in the fourth quarter of ’01. This rally was squelched when the index ran into the resistance of the 12-month moving average and reversed and headed down to reach new lows.

While I don’t see the S&P re-visiting the lows of March, I do see the 12-month moving average acting as resistance for the coming months. You should also note how the market was coming out of an extreme oversold reading when the last earnings season rolled around.

The bottom line is that investors are looking for a reason to be optimistic, but they aren’t going to settle for not being as bad as expected. The bar has been raised a little this quarter and stumbling across the hurdle won’t cut it this time around. Breaking through the resistance of the 12-month moving average is going to take more. I look for earnings to serve as the catalyst for the next wave of selling, dropping the S&P back down to the 800 level.

Should the S&P reach 800 again in the coming months, I will re-evaluate the chart and the investor sentiment at that time.

Disclosure: No positions on any companies listed in this article.

Comments

[Old Trader:]

I fully expect we'll be seeing more than a bit of comments like "better than expected when special items are excluded" accompanying earnings releases. Probably of more import will be any guidance issued along with the numbers.

Jul 02 09:09 AM

[Ted Hurlbut:]

The challenge for the industry that I'm a part of, retail, is that all of the cost cutting has been done, and now we've got to find a way to move the top line.

Jul 02 03:40 PM

[Old Trader:]

Ted,

You're certainly not alone in that particular boat.....in fact, I'm hard pressed to think of ANY industry, except perhaps education and health care that's going to have any meaningful top line growth for a while.


On Jul 02 03:40 PM Ted Hurlbut wrote:

> The challenge for the industry that I'm a part of, retail, is that
> all of the cost cutting has been done, and now we've got to find
> a way to move the top line.

Jul 02 04:57 PM

[nmelendez:]

But you are wrong..in a sense. Emerging markets is where the money is, espeacially BRIC, UAE and SA. China is using it's huge US reserves as ONE HUGE BANK. They are going to start trading in each countries currencies. That way each and every nation it is associated with will prosper since they will be actually using USD as a trade instrument garantee. I especially like Argentina(very undervalued) and Brazil. My other trades would be US technology and India Internet. That on top of china of course.
Get ready for the 1930's all over again. Buy emerging markets.


On Jul 02 04:57 PM Old Trader wrote:

> Ted,
>
> You're certainly not alone in that particular boat.....in fact, I'm
> hard pressed to think of ANY industry, except perhaps education and
> health care that's going to have any meaningful top line growth for
> a while.

Jul 04 03:11 PM

[nmelendez:]

Disclosure..I own PZE which pays 5.70% dividend. P/E 7.7. Only 213 million shares and is the major player in Argentina for Gas stations and oil derivative products. That plus it's Gas lines. It also is in Brazil.

Jul 04 03:15 PM

[Archman Inv...:]

As always I look for one thing: Revenue.
Either a company is collecting cash or they are not.
Period. I want to see rising or improved revenue.

Ignore EPS numbers. Those earnings numbers are what I like to call the financial media's way of reporting earnings.

Ignore the "beat by a penny" nonsense.
Next time you hear that, ask yourselves: "Who exactly got that penny anyway?"

Jul 06 02:39 PM

[Fighting Yoda:]

PPT team is still hard on the job -earnings will be spun one way or another – ‘better than expected’, ‘could have been worse’ ‘getting less worse’. But the profit boosting via cost cutting strategy through job cuts would be over in this quarter- going forward would be tough sledding- even though YOY comparisons would still be easy. I think we will see terrible results from Alcoa and Dow to start things of this week.

Jul 06 04:15 PM