Great Earnings Might Not Be Good Enough – The Headwinds Are Blowing!

October 16, 2009
Author: Peter Stolcers, Founder of OneOption

It's all about earnings, and more importantly the market's reaction to those releases. After seeing a muted response to Goldman's blockbuster number, I suspected that all of the good news might be built into financial stocks. J.P. Morgan Chase also smashed estimates, but the stock did not rally. That had me cautious heading into earnings from Google, IBM, Bank of America and GE. Google increased sales by almost 20% and profits by 9%. They gave great guidance and the stock traded higher after the news. IBM posted higher-than-expected profit and it raised full-year estimates up to $9.85 per share from $9.70 per share. EPS increased more than 17% year-over-year even though revenue fell 7%. Great results were priced in and the stock fell after the release. Bank of America posted a wider than expected third-quarter loss of $1 billion. Merrill Lynch contributed $2.2 billion in profits but it was not enough to offset $9.6 billion in credit losses. Consumer credit still has bankers worried and Chase, Citigroup and Bank of America all voiced concerns this week. GE posted better-than-expected earnings, but revenues missed. Sales were down by 20% to 37.8 billion, below the 39.5 billion analysts had expected. The stock is trading lower after the news. Great earnings are priced into stocks and the best chance for a big rally will come from the early releases. We are not getting that rally and it tells me that next week's earnings might not be good enough. Cyclical stocks have rallied on the notion that earnings will rebound as the economy recovers. We are still not seeing revenue growth and investors are growing impatient. Regional banks do not have investment banking or trading to lean on and their results could be weak. This leads me to believe that we could see profit-taking next week. It's too early to call a top and as long as technical support holds, I will maintain a bullish bias. However, when good news fails to spark a rally, it's time to be cautious. Monday, Apple will release results. They will blow the doors off of estimates, but that's expected and the stock might not rally after the release. Amazon will release next week and this morning we learned that they are in a major price battle with Wal-Mart. That does not bode well for profits. If I look at the major tech stocks that could push the NASDAQ higher, I don't see much firepower left in Google, Intel, Apple, Amazon, or RIMM. Next week will be filled with earnings releases and this is a great time to sit on the sidelines and watch the market's reaction. Interest rates will remain low and economic releases are likely to be "less bad". Earnings are the "unknown" and next week we will know if valuations are stretched or if there is more room to run. There are a handful of economic releases but they are not likely to move the market. I will highlight them Monday morning. Consumer sentiment came in weaker than expected this morning, but the market was already headed lower after earnings announcements. Option expiration will add volatility to today's trading and we can expect choppy action. There are many earnings releases to come and I do not expect a major decline today. M&A activity has picked up and traders will not go into "Merger Monday" aggressively short. The first line of support is SPY 107. That is the recent breakout. The critical support level is SPY 101.50. If we break below that, I will start turning bearish. As long as we stay above it, I will be selling out of the money puts on strong stocks after they release earnings. image

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