Q2 Earnings Preview (Part I): It Could Get Ugly

by: Brian Nichols

For the last year I have played earnings, which means that I have bought stocks either before or after a company announces its quarterly results. With the exception of last quarter I have been highly successful with this strategy, and over the last two weeks I have received countless emails asking if I was playing earnings this quarter. And I have kindly responded to each person by simply saying "NO."

I may be wrong but I believe this will be the worst earnings environment that we have seen since the recession, as far as expectations, actual reports, and the reactions that follow earnings. I think we will see 50% of companies exceed expectations, however it's the guidance that I believe will be so weak, and lead to significant declines. Therefore, I expect stocks to push the markets lower over the next two months and possibly match last year's sell-off.

Last year, in July and August, when the markets were in turmoil and trading lower, I stated several times that I was buying on the dips and that the markets were fine. One year later it turns out that I was right as the markets have recovered with authority, but I believe this earnings will be the start of another sell-off that could have more impact than last year. The reason is because last year the markets were falling but large corporations were still beating expectations, with solid guidance. But already in the last two months we have seen several companies announce poor earnings and lowered guidance, therefore pushing stocks, and sometimes industries, much lower.

Lately we have seen countless companies cut guidance in all industries which include: Cummins (NYSE:CMI), hhgregg (NYSE:HGG), Advanced Micro Devices (NASDAQ:AMD), Nike (NYSE:NKE), Procter & Gamble (NYSE:PG), Fossil (NASDAQ:FOSL), Tempur-Pedic (NYSE:TPX), and Family Dollar (NYSE:FDO). As you can see these companies range from consumer to semiconductor companies, and are only a few of the companies that have lowered guidance in the last couple months. I think we will see a similar trend throughout the next month, and that it will drag the market much lower and kill investor confidence. And remember, if hhgregg lowers its guidance it drags Best Buy (NYSE:BBY) lower, it doesn't matter if Best Buy's earnings are great, this is a speculative market and when a company shows weakness we assume the industry is weak, therefore bringing the market lower.

Despite my beliefs that we are about to experience a massive bear market and that stocks are going lower, there are a few companies that I believe are worth watching. For example we have seen a 5% increase in industrial production during the second quarter, therefore some stocks in this space may surprise the market. And of course I will stick to my belief that when in doubt just buy Apple (NASDAQ:AAPL). Therefore, I will release a weekly article with stocks to watch before earnings, however I still believe the next two months could be dangerous in this market. There are growing concerns in Europe, China, and our labor market is a mess and politicians seem far from reaching what could be a solution to the labor disaster.

We have seen significant commodity declines and companies will be conservative, especially with an upcoming fiscal cliff. These combined factors, and recent weakness in corporate guidance, is why I for the first time ever am shorting stocks, and are bearish on the short-term direction of the market. The only good thing is that weak earnings may finally wake Ben "better-late-than-never" Bernanke, and force politicians to find a solution to the job crisis and act on the global crisis that is now reaching the U.S. Because in the past these issues have only been concerns, but now they are beginning to cause fundamental problems, and if political leaders don't act soon this market could get ugly real fast.

Disclosure: I am long AAPL.

Disclaimer: The material in this article is for informational purposes only and should not be used to make any investment decisions.

Continue to Part II >>

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here