"July is the best month of the third quarter [historically] except NASDAQ. [The] start of second half brings an inflow of retirement funds." (Stock Trader's Almanac 2012 Edition, Jeffrey A. Hirsch & Yale Hirsch).
Let's begin with a link to the calendar for companies who will be reporting U.S. earnings beginning Monday July 9, 2012. We see that it will kick off with names like Alcoa (AA) and Yum! Brands (YUM). These two companies will help set the tone for the week. AA, which is only 52 cents above it's 52-week low has an analysts' consensus EPS (earnings-per-share) estimate of just $0.06.
YUM has an analysts' consensus EPS at $.70, which would be an almost 17% increase year-over-year on a possible 11% rise in sales. If either company disappoints, and if the macro-economic headlines continue to be blood-curdling, watch out below!
Let's look at a 1-year chart of the S&P 500, including the simple 200-day moving average (MA) line and the Bollinger bands.
It's clear to me that the SPX could fall another 4% and still be at or slightly below the 200-day MA and the lower Bollinger band. That's precisely where it fell to on June 4th with an intra-day low of 1,266.74. It closed on Friday July 6th almost 6.5% above that level. So we're witnessing a pattern similar to last summer, when in late May and early July 2011 the SPX hit two high points before falling off a cliff.
If the power of program trading and computer algorithms are at work here, we might extrapolate that we just witnessed two similar peaks. June 19, 2012 the SPX hit a high of 1,363 and on July 3rd, less than a week ago, it went up to the 1,375 level before this correction began. The last time the SPX was this high or higher, May 1, 2012, it corrected 8.7% down to the May 18th low of 1,292. Then the SPX bounced 3.3% higher to the May 29th high of 1335 before falling another 5.09% to the June 4th low of 1,266.74.
The debut of the new round of earnings reports may put the entire U.S. stock market on very thin ice. Now's the time to be both defensive and proactive. Consider dividend paying cash titans like Microsoft (MSFT). With all the negative news lately and CEO Ballmer under fire, perhaps we'll see it test its 200-day MA of around $29 (see chart below).
At $29 and paying an $0.80 annual dividend, that would make the yield to-price a sweet 2.76%. The June 4th low of $28.32 would lift that yield to 2.82%. Companies like Clorox (CLX), whose dividend yield of 3.5% has more than doubled since 2006, and Kraft Foods (KFT) are worthy candidates.
KFT price-per-share was as low as $37.10 on June 28, 2012. Those who can captures shares at that level will own a yield of nearly 3.13%. CLX shares dipped as low as $70.72 on June 28th, so what's to say that can't happen in the uncertain days and weeks that lie ahead. Having lowered guidance on expected earnings, even much-maligned Procter & Gamble (PG) could fall toward their 52-week low of $57.56.
With their current $2.25 dividend, that would create a 3.90% yield if PG is purchased at $57.56. At a price of $56.30 the yield moves up to 4%.
So realize that this month's earnings season comes at an ominous point. The good news is that earnings expectations are lower than last quarter. The bad news is that it hard to find any good news at the moment.
Europe's situation still look perilous with their temporary European Financial Stability Facility (EFSF) and permanent European Stability Mechanism (ESM) rescue funds geared to many compliance regulations. The U.S.manufacturing and employment news last week was underwhelming and yet the Fed doesn't look ready yet to offer an unexpected economic rescue announcement. So the choices are to do nothing or to be ready to buy the bigger dips and start setting some buy limit price levels for your favorite stocks.
Remember the words of one professional trader, who meekly said, "I'd rather be positioned as a petrified bull rather than a penniless bear." Keep your eyes on the SPX 200-day MA, be cautiously optimistic, and let your wish list of stocks chase you, and not the other way around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.