Don Dion's  Instablog

Positive earnings announcements continued to buoy stock prices this week. Apple delivered better-than-expected earnings after the bell on Wednesday and shares are up 5 percent in early trading.

Earnings season has widened economic sentiment among market participants. Bullish investors believe the worst may be behind us, at least for corporations that adapt to the new operating environment. Bank bailouts may or may not be viewed negatively by these investors, but all the bulls believe the amount of capital being pumped through overt and covert (to the general public) means is sufficient to stabilize the sector. Profitable banks will begin lending again and recovery will arrive later this year or early next year. Meanwhile, the Apples of the world are finding ways to grow profits.

Bearish investors, conversely, hold the opposite opinion, and the bulls’ optimism is itself a reason for their increased bearishness. Bears expect the stress tests to reveal weakness in the banking system, possibly unintentionally, because investors may not trust the government’s report. The Treasury’s economic assumptions are too optimistic: in the worst case scenario, for instance, Treasury assumed 10.3 percent unemployment in 2010, but at the current rate of job loss unemployment may exceed 10.3 percent in 2009. Also, while many companies have reported strong earnings, many have not. UPS missed estimates this morning and announced a profit decline of 56 percent. The delivery firm said it will seek to cut costs, a popular tactic at present. 

Economic data will worsen even as the economy improves because data is backward looking, and many indicators, such as unemployment, lag the economy. Stocks will climb a wall of worry and many naysayers will miss the start of the next bull market. Right now, there’s plenty of worry, and it has stopped the rally in its tracks. After a full six weeks of higher closes, the market is down for the week following Monday’s 4 percent sell-off. Several high-profile investors, such as Jim Rogers, have said they didn’t buy the rally, but they aren’t shorting it either. It speaks to a level of uncertainty among all the market’s savviest participants, but clarity may follow the full release of the stress tests on May 4.