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A “SELL THE NEWS” EARNINGS SEASON COMING UP?

12 April 2010 by Cullen Roche 1 Comment

Stocks have been on a tear as investors price in a very strong earnings season for Q1, but how much of this is actually in the market already?  David Rosenberg notes that stocks are unlikely to continue their rally based on the high levels of optimism and low negative preannouncements:

“Finally, Q1 earnings season kicks off today with Alcoa after the bell.  There is a nifty little article on page C1 of the WSJ which notes that when we head into quarters with tremendous optimism and a very low negative earnings preannouncement ratio like we have now (1.3x versus the long-turn norm of 2.1x), the equity market struggles in the first month of the reporting season as either the results do not live up to their billing or they do and a round of profit-taking takes hold.  When negative pre-announcements are low, the S&P 500 is down 1% on average the first month of the reporting quarter.  When pessimism is high and the negative pre-announcement ratio is above-normal, the market rallies an average of 2.1%.”

Source: Gluskin Sheff

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Comments
  • T.W.R.

    Time will tell I guess. I really question whether or not the markets will permit a traditional 10% correction ever again. We got close in January, but there was an intra-day reversal and, the next thing you know, the worst close was no lower than 8% or so from the peak. As soon as we get close to what would likely be an entry point for a lot of “cash on the sidelines,” traders trying to get ahead of the curve plunge in and start driving the market back up. It seems like the handful of folks who are buying and selling are so zealous to drive prices up that there won’t be an opportunity for people who missed this most recent rally to get back in anytime soon.

    I don’t know if Bollinger Bands and short-term moving averages (like 20 days) mean anything, but the S&P 500 has been coasting along (and recently breaching) the upper Bolling Band of its 20-day SMA for weeks now. And, in fact, the lower Bollinger Band of the 20-day SMA is actually above both the 50 and 100 day SMAs. I’m not sure, but I think this makes it, as Hussman puts it, “strenuously overbought.”

    But does it even matter? Maybe mean reversion has also gone out of style as well?

    04/12/2010 at 9:26 PM