Q2 Earnings Effect: Make or Break?

Quiet frustration looms just beyond the facade of bulls who called for a market extension near the S&P 500 high of 945, while those heralding to invest in stocks upon a 10% pullback are beginning to feel the heat.

Meanwhile, the substantial chatter concerning a "toppy" head and shoulders pattern of late in equities has combined with economic fundamentals which remain volatile and pessimistic. The path of least resistance in equities has thus proved to be lower, yet hype will be substantiated only through earnings season.

Whether earnings will beat or miss estimates is an unanswerable query, but the action taken by investors given sentiment leading into the announcements can be anticipated and profited from.

First we must spin back the reels to Q1 earnings and the atmosphere ahead of the announcements. Referring to the image below, remember that average earnings had been revised down for Q1 given the strife seen in the 2008 Q4 period yet the market charged into the announcement period. leading into Q2 earnings, top and bottom line numbers must beat estimates while froward looking statements must suggest strong growth in the near term time-line.

A repeat of the Q1 "non-doomsday" earnings season will chime in antiquated at best, causing investors to flee cyclicals in preference of safer vehicles.

While sentiment in March was arguably more negative than June has been positive, the theme of a market that decides where it wants to go irregardless of actual information has not died. We have found ourselves on stronger footing as of late, due to a temporary stabilization of the financial system, however the credit card and commercial real estate shoes have yet to drop.

In the end, any Q2 earnings season that doesn't beat consensus across the spectrum will find little sympathy amongst investors in a trader's market.

Financials will be in focus as the steepening yield curve prompted many to load up on positions within the sector, yet mortgage applications, foreclosures, and credit card defaults could spoil the party for banks.

Retailers will also weigh in as the reports throughout the quarter of same store sales have missed estimates.

Commodities are diving lower as the "green shooters" pipe down on a day where record auto sales in china met slothful earnings from Alcoa (AA).

Perhaps the centrally planned economy knows more about stimulus than their invisible handed western brothers...

Could an earnings season littered with key players reversing three months prior optimism lead to a selling panic or will corporate guidance be met and forward looking language lead stocks higher? Resistance around 850 corresponding to the 50 day SMA on the S&P 500 will be a crucial area for the index and the broader U.S. equity market.

Disclosure: Short USO, Short UNP, Long SKF, Long DXD

Comments

[Roger Knights:]

Look at the beautifully smooth curve in the chart as the trend rounds over. It looks to me as though the market will move sideways or a bit upward for a week in order to hit that curve, then roll over.

Jul 15 05:53 AM