Q2 Earnings Could Be A Sell the News Event. Watch For Negative Reactions After Good Results

July 16, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market continued to climb. Earnings season has started and financials are posting strong numbers. However, good news is priced in.

This week we will get a good sampling from a number of different sectors. I will be watching Yahoo, eBay, IBM, Google, Honeywell and General Electric. The guidance for Q3 will be critical.

As I’ve been mentioning, 20% of the S&P 500 has updated earnings estimates. Negative revisions outnumber positive revisions by a ratio of 5 to 1. Revenues are expected to grow 1.5% and profits are expected to grow 2.5%. This is one of the worst year-over-year comparisons in many years.

Retail sales came in light of than expected and ex-autos and gasoline consumption increased .1%. Analysts are revising Q3 growth down to 1%. The sequester has yet to run its course and conditions are slipping.

China’s economic releases were fairly weak Sunday night and GDP grew by 7.5%. Growth for 2013 is at a 23-year low and the government does not plan to stimulate. Europe’s economic conditions are dire and they have been in negative territory for six consecutive quarters.

Interest rates are rising and the Fed is ready to taper. Ben Bernanke will testify before Congress Wednesday and Thursday. His comments have remained constant the last two months. However, one day the market likes his comments and the next day it does not. Any surprise favors the downside this week.

The strongest companies announce early in the earnings cycle and the news will be good. Stocks will try to push higher and that will attract bullish speculators. By the third week of earnings, the reactions should start to sour. Analysts will evaluate year-over-year comps and they will not be impressed. Asset Managers will not chase stocks at an all-time high. They will wait for signs of economic growth.

I don’t know how much gas is left in the tank, but I am more inclined to short than I am to go long. This snapback rally has come on extremely light volume and the selling in June was very heavy. This tells me that resistance is strong.

I will be watching for signs of strain. Companies that decline after posting strong results are a red flag. This indicates that stocks are fully priced.

The market looks soft today. Buyers might pull bids and that could result in and air pocket. The price action is momentum driven and if the decline gains traction, it will continue into the close.

I am buying a few puts today and I will be quick to take profits.
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