Third quarter earnings season is underway and a huge amount of names will divulge their results this coming week. I love the start of earnings, so much uncertainty (and usually some negativity) that at least I get some sort of leg up analyzing the chart and technical picture.
This is an important earnings season, we’ll find out what companies are seeing about future demand, the economy and how policy is going to play into their forecasts.
Some of the things I look for on the technical side: has the chart been broken or is breaking out? how is the volume? is the stock under accumulation? Has the price accelerated where it may be pricing in a quarter’s performance? How about options? Have we seen some huge volume come in at certain strikes that tend to make ‘no sense’? Is the market pricing in a big move or not? What type of influence will a stock like Apple have on earnings (collateral damage or benefit)?
On the fundamental side, I simply look at trends and momentum. Did the company beat last time around by a mile? If so, in my experience that trend generally (not always) continues for two-three more quarters. How is the change in currency going to affect the quarter? Is it priced in already? Which group is leading? Remember, a rising tide lifts all boats.
Markets are in a bit of a correction mode here, distribution days are heavy but losing a bit of ground is not necessarily a bad thing. Talking with my friend and Real Money Contributor Ken Shreve a couple weeks ago he mentioned that a ‘three-five percent correction would be healthy to peel back some of the excess froth that had been put on the market since the Euro and Fed meetings’. Turns out he was spot on, the SPX 500 has come in about 3% from the highs (see chart). Real Money Pro Contributor Carolyn Boroden, the fibonacci queen has mentioned frequently about the potential for downside, as recently as two weeks ago.
Volatility has dropped sharply and remains low. What seems to be a concern is the high complacency and lack of concern which is just one end of the spectrum (of fear and greed). With much of the uncertainty already uncovered does it make sense to accept equities as the best investment choice? That sort of thinking is dangerous, especially with other likely market moving events on the radar. The election is less than a month away, and there is this fiscal cliff situation. For now, the market is sanguine at this time about an outcome.
