EPS Season – July 12, 2010
Earnings reports for the second quarter begin in earnest this week and should add some volatility to the equity markets. Alcoa Aluminum (AA) is the traditional stock that kicks off EPS season and will report Monday after the close. Other stocks that report Monday include (CSX) a key transportation company and (NVLS) Novellus, a semiconductor equipment and materials company. These three diverse companies could yield some early insight into the strength of the economy and the tone will be set for the other EPS reports that follow.
The reason EPS reports can add volatility is the creation of catalysts to move stocks. It often takes a catalyst to generate change in motivations of buyers and sellers with enough priority to create big moves in stocks. This can happen when a company beats or misses an EPS estimate by a wide margin. This can also happen when the forward guidance creates a stir or comments in conference calls send a key signal to traders. Catalysts become more important during periods of low volatility in the markets such as summer.
Volume can drift down during summer months and last Friday was one of the lowest volume days in many months. Friday was also a very narrow range day. Recall that we wrote recently about volatility being cyclical just as price is cyclical. The low volume, narrow range day from Friday leads to higher odds of a bigger move and possible range and volume expansion on Monday. Monday’s in summer can also be of the low volume variety so it is possible that a better breakout may occur on Tuesday after the EPS reports are processed.
Do not chase price or force trades during low volume low range trading. These are the most difficult environments to trade profitably and it is better to wait on the market to move and create more opportunity. The ESU10 has had a nice 75 handle rally but volume has tapered off over the past few days. Low volume rallies during overall down trending market environments usually lead to more downside. Continue to be defensive but be on the lookout for a better break (up or down) to trade early in the week.
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