Earning Season Gearing Up – Overall Market Points to Caution – Shorting Stocks

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As we mentioned back in May, the SPY managed to push all the way up to about 95 on what we consider to be a bear market rally borne out of Spring optimism. What we have now looks like a head and shoulders top and the next week or so is going to be crucial. Since the SPY is below the 20-day and 50-day we suggest caution. If 87.50 can’t hold I would expect 85 is not far off.

If the SPY manages to hold above the neckline we will be watching how it works into the apex of this triangle. A break of the downtrend line would indicate that a resumption of the rally but we would also want to see it back above the 20 and 50 day moving averages. As we are in a danger zone here we suggest that traders have stops under all holdings and think twice about holding positions overnight unless a partial profit has been taken.

A lot is going to hinge on Earning Season.

We maintain a look-ahead earnings calendar in the Research Lab and scanning over the rest of this week and next, only a handful of companies are expected to post higher earnings that the same quarter last year.

FDO Family Dollar stores

PGR Progressive Corp.

ABT Abbott Labs

CCK Crown holdings

IBM Int’l Bus. Mach.

BMI Badger Meter

CBST Cubist Pharmaceuticals

Out of about 60 major corporate earnings releases from now until July 17th, only these 7 companies are expected to grow earnings.

That does not mean that some of the other companies might not beat the expectations, but it indicates that this earnings season will be tricky.

Normally for our earnings scans we like to see:

Profitable – Positive earnings
Beat expectations
Grew earnings Year over Year 20% or More
Stock Trades Higher with White Candle within a few days of release

Ideally the company comes out with better than expected earnings and is upgraded and future estimates are raised. This used to work well in the past but the new paradigm is based on the forward guidance and the tone of the conference call. It amazes me to see companies that post a loss and earnings miss spike up while profitable companies that beat the street gap down and tank.

Holding a stock when the earnings are released is a crap-shoot. Over the years I have seen stocks gap down and lose 1/2 their value on a slight miss and others take off like a rocket on a loss, so you have to be very aware when the earnings are coming out on any stock you might hold or think of trading.

The one thing about earnings season that I like is that it introduces the catalyst for a stock to move dramatically. Much of the time, especially in the summer it’s like watching the grass grow on many stocks, but when earnings and conference calls and forward guidance are in the picture is makes for some great action.

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