Earnings season moves into full swing this week. The last earnings season was quite good compared to expectations. In my opinion, it was the primary driver of the strong October ’11 broad market rallies. Now, as we approach 4th quarter earnings, I think expectations are overly exhuberant and the recent rally since late December has lacked volume. I continue to see bearish signals all around. Most of my technical analyses have prompted sell signals for most of the past few days some bearish indications have occurred for more than two weeks.The consistant failure of these signals is highly unusual. Ryan Mallory mentioned the “January Effect” this past week as a possible explanation. The January effect is well documented and certainly a plausible explanation. “The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. Another cause is the payment of year end bonuses in January. Some of this bonus money is used to purchase stocks, driving up prices.” http://en.wikipedia.org/wiki/January_effect
The fundamental bear case is a well known cocktail of european debt woes, austerity packages, Chinese belt tightening and diminishing QE/ stimulus measures. The bear case acceptance perhaps has created a balancing effect for the markets. We are all where aware that there are extrodinary short postions in the Euro. I contend that there are many othere specific sectors and equities that are also crowded with shorts – included would be alternative energy, financials and selected metals to name a few. Every short seller is the only market participant that MUST be a buyer eventually. These buyers seem to have provided additional price support and occasional dramatic buying pressure for the markets since the August correction. The third quarter earnings season definitely squeezed many overweight short positions that we’re caught of guard.I’m included, I exited only about 2/3 of my short positions at the start of the October rally as I doubted its full strength. Fortunately, November was more kind to the bears as the mid- November sell-off allowed some releif… and the November selling would be an early indication of a possible January effect as the wash rule would indicate selling at least 30 days before the end of the year to allow for reinvestment in January.
I see the broad markets as vastly overbought and ripe for correction, the catalyst for the correction has long been expected to be an event in Europe, but I’m expecting this earnings season surprising many bulls.
The following blog is excellent analysis of what might be expected in the looming earnings releases. Following are some excerpts:
“It is somewhat ironic that the growth in earnings was robust when the economy was anemic, but now that the economy seems to be picking up, earnings growth is slowing down dramatically.”
“While we don’t have the drama of multi-billion dollar bank losses, this is the weakest start to an earnings season since the depths of the Great Recession.”
