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What do Earning Surprises Mean?

|Includes: SPDR S&P 500 Trust ETF (SPY)

From  CNBC:

The blended earnings growth rate for the S&P 500 for Q3 2009, combining actual numbers for companies that have reported, and estimates for companies yet to report declined to -25.4% from -24.9% in the previous day.
As of October 1st, the earnings growth rate was -24.7%. Of the 27 S&P 500 companies who have reported Q3, 78% beat estimates, 11% were in-line, and 11% were below estimates.  The blended earnings growth rate for the S&P 500 for Q3 2009 is currently at -25.4%. (Data provided by Thomson Reuters)
This shows two things:
  1. Analysts change earnings estimates up to the day that earnings are released so skewed to the upside surprises are to be expected.
  2. Earnings estimates are getting more negative, down -0.5% in one day.
More than likely, the market will react positively to the surprises which should come in for about 77% of companies based on the above and the 2nd quarter track record.

Looking at Alcoa, the quality of what is happening is still poor as with the revised estimates Alcoa has a 27 forward PE.

Based on all of this I am going to keep on my negative position but I think it is going to hurt a lot in the next few weeks.

We'll see.


Disclosure: RYDEX INVERSE NASDAQ 100 2X CL H