The Earnings Season Party Ends

Earlier in the week we posted that the Q2 earnings season was tracking to be the best in terms of market performance in at least 8 years. Unfortunately for the bulls, the earnings season party came to an end yesterday with Wal-Mart's (WMT) report. When the closing lights came on, the S&P 500 was up a whopping 15.14% since Alcoa (AA) reported on July 8th.

Bespoke readers will remember how strong the market was during the first quarter earnings season as well. With a gain of 9.51% from April 7th through May 14th, the Q1 reporting period had been the best earnings season for the S&P 500 in 8 years heading into to this quarter. But once Wal-Mart reported on May 14th, the bulls strugled to find the next catalyst to propel shares higher. From the end of the Q1 earnings season to the start of the Q2 earnings season, the S&P 500 was down 1.51%.

Don't be surprised if we begin another period of sideways trading now that the most recent earnings season has come to an end. With the Dow down a quick 150 this morning, it looks like the hangover could be pretty rough.

Comments

[ETFdesk.com]

Lets see how Bespoke does over time...tinyurl.com/lkqkhr

2009 Aug 14 04:15 PM

[Windwood Trader]

I believe that the tea leaves could be read without a lot of difficulty. The one shot tax rebate last year caused a spike in buying (and a little credit card debt reduction) but it only lasted a month or two. The "clunker" program gets a few new cars off the lot but does nothing for the systemic problem- Too much leverage- Not enough capital- The consumer everyone is waiting for to bring home the bacon is the wisest of all- Or maybe most fearful. Hunkering down isn't a bad idea right now.

Let the beached whale die its death and lets get on with whatever is reality. The asset base compared to what finance is available out there will be impossible to reconcile. Assets that aren't necessary any more will go unpurchased or sold at distress prices. Banks are, and should be afraid to lend money for home mortgages knowing in their heart of hearts that home values are already underwater before they take on a new mortgage. The second home, the Beemer as the 3rd car, the Med cruise are all on the block- The whole world economy save a few hardliners became a humongous Ponzi scheme that won't get fixed overnight. Sorry, kids- No instant gratification this time. School of hard knocks here we come.

2009 Aug 14 05:27 PM

[Robert Martorana]

BIG:

Good observation about earnings season and about Wal-Mart.

The 1Q earnings rally occurred because the liquidity boom took hold, and because we stopped falling into the abyss. The 2Q rally happened because the market focused on earnings surprises and ignored the lousy earnings quality: seekingalpha.com/artic...

Looking ahead, the Zacks data on 2Q is bearish, since the earnings "surprises" have not led to earnings revisions. This suggests the rally has no legs, and I discuss it here: seekingalpha.com/artic...

I agree with your premise that the market is due for a pause. Given the sharp rally since the March lows, a correction is more likely than a pause (despite massive injections of liquidity by the Fed).

Thanks for your comments,
Rob

2009 Aug 14 06:37 PM

[thechaser]

Hi BIG:

Mar 30
Apr 20
May 11
Jun 15
Jun 22
Jul 6
..... Aug 17??
I mean, the river runs through it. Maybe a topic for one of your articles. I have been missing an update on overbought, not seen a thing since 24 Jul.

2009 Aug 14 10:50 PM

[BestInvestIdea]

This last week was a volatile one for the markets, which witnessed the domestic equity markets down slightly overall for the week. The market was hesitant going into Wednesday’s Fed decision on monetary policy (which resulted in no change in interest rates), rallied, then gave it all back by Friday. While there is still another week or so of corporate earnings due out, there isn’t too much on the horizon in this seasonally slow period to get excited about. It seems that, with a market up 45% or so from its lows, it is easier to go on vacation at this point then to try to figure out which direction the market will take next. On the bullish side there is the incredible monetary stimulus, (slowly) improving economy, low inflation data (CPI data released today showing 0% inflation) and all the cash on the sidelines waiting for a chance to get back in the market. On the bearish side there is the fact that no historical period has seen a rally from a bear market low that was this strong in this short amount of time, the lack of a bottom in the housing market, rising unemployment and improved economic data that is largely due to inventory re-stocking and cost cutting rather than sustainable economic growth.

When investors come back after Labor Day and trading volume returns, we will see the true direction of markets. We continue to believe that equity markets will continue to climb the “wall of worry” and defy logic. However, we still believe that volatility will continue to increase, like we saw this week, as investors react and try to assign value to every new data point. We think another correction is due, and could have already begun, similar to what we saw in late June/early July. However, we would be buyers of the dip at this point as we believe sidelined cash will continue to want in, and the Fed/Administration will keep the stimulus and economic programs coming as long as it takes. With the seasonally volatile September/October period soon upon us, we are maintaining our conviction with our current holdings (see “portfolio and trades” category in the left hand column) and will wait to put more money to work until we see another correction.

2009 Aug 15 12:54 AM

[Master Che]

I strongly disagree...This is a bear rally fueled by bearish fundamentals.

2009 Aug 15 09:38 AM

[WheelsComingOff]

There's only so many cuts you can make. Companies have shaved to the bone, with no bump in revenues. Still SO much deleveraging needed to be done. If FASB actually follows through with mark-to-market, say goodbye to banks. This could get ugly!

2009 Aug 15 02:43 PM

[auto44]

Earnings increases caused by cost cutting(layoffs) and not by increased sales and real profit margin improvement are not indicators of prosperity. Beating the analyist, just hype in 99.9% of the cases, MANAGING THE BOTTOM LINE INSTEAD OF THE TOP LINE.

2009 Aug 15 04:01 PM

[whidbey]

Bet on the fact that the reported earnings are not the same as the adjusted earnings (and that the difference matters). The markets have overplayed the good news and fooled most everyone. Can it happen again? I suppose, but why is it possible??

Without final demand where do earnings go next? Unemployment likely to rise and where to earnings go next? Speculation and front running the economy is dangerous and I see nothing to support those actions. Do you?

2009 Aug 15 06:59 PM

[j-dub]

Besides earnings being much weaker in the next 2 quarters than 1Q and 2Q (no more freebie one-time credits due to capital raises, etc), economists are OBLIVIOUS to the trends occurring in main street.

I see people in Dollar stores, bargain stores like Ross and Marshalls, etc.....But upscale stores like Macy's and others are pretty empty. And that is in a healthy economy like Houston. This morning there were literally dozens of cars lined up in a Kroger gas station selling regular unleaded at $2.39. The Chevron station across the street was empty and the gas was only 5 cents higher.

Let's face it, saving has now become fashionable and when people need to spend they will go to a bargain store or look for sales/clearances. The only reason cars are selling is for the clunkers program. When that money goes away, cars will not sell.

I will take at least 2 years to see a real recovery. And that is only is Obama pumps on his spending brakes.

Economists and the Bernankes of the world think that two points make a trend.....that does not work in the real world. In La La Land, however..................

2009 Aug 15 08:53 PM