The reality of the current market sums up nicely in the two sentences below.
- If the economy can crank back up again early this year, stocks are cheap. If instead corporate America is seeing a fiscal cliff hangover that could last through the first half of 2013, markets could get sloppy to the downside.
Simply, earnings will improve if the economy picks up and the markets will rise, but if earnings do not improve, the market goes down. The sub-text is that US politics are the lynchpin for either move. The author of the notion above thinks as I do – ultimately, the market cares about one thing and that is corporate profit. Corporate profit is the foundation for the bull rally that has now lasted almost four years. Will it continue?
Today Alcoa announces its earnings and its forecast. Aside from a few insiders and their friends, no one really knows what Alcoa will announce, so today’s market reflects a sense of angst, a feeling that it could go either way. Consensus tells us that Alcoa will beat the mark, yet the drumbeat out there is that overall earnings will drop, relative to the fourth quarter of last year.
- Though the art of sandbagging – forecasting weak results then beating those estimates – is a time honored Wall Street tradition when seemingly every CEO in America complains about the same thing it’s hard to ignore.
Expectations are low, for sure, and companies are apt to set the bar low for obvious reasons, but let’s think back over the last four years. If you do, you will say to yourself, “What else is new?” The predominant refrain that runs through my memory is that in front of every earnings season in the last few years, the breathless media suggests that this coming season will not be good. Almost to perfection, though, the earnings seasons overall have not lived down to the media predictions. Yet the beat goes on …
- Warning to investors: major U.S. technology companies could miss estimates for fourth-quarter earnings as “fiscal cliff” worries likely led some corporate clients to tighten their belts last month and refrain from spending all of their 2012 IT budgets.
The above is specific to technology, but if you look around, the fiscal cliff and poor earnings theme is ubiquitous. As it was last quarter, it might be that earnings fall short (almost to perfection). It might also be that market players are looking past the fiscal cliff impact on earnings and that market movement will depend less on earnings and more on the noise coming out of Washington. The public argument is coming, so we should keep an eye on the flow of money. How much is coming in and where is it going?
- Although last week’s move was impressive indeed, this week will be the telltale sign if the bulls have enough conviction and buying power to take this market higher. Why? Plenty of money came into the markets the first day back, however, the volume and interest waned as the week went on. That’s pretty typical to kick off a new year and a new quarter. What we need now in order to be convinced the indexes are moving higher is a resurgence of last week’s early volume.
Pinch your ears and keep your eyes open. The promised land is out there, but there are choppy seas to cross before getting there. In the meantime, buy the troughs and sell the crests.
Trade in the day; Invest in your life …
