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Earnings season is here…will the market sell off like the last two times?

Over the last two earnings seasons in Oct 2009 and then in Jan 2010 the markets sold off initially after results started to come in. Could that bearish trend return to the markets despite Intel’s earnings?

The integrated circuit from an Intel 8742, a 8...
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Traders and investors have reason to worry in the short-term, but the overall picture is not too bad.

The earnings estimates for this season are quite demanding with both top and bottom line growth expected. The projections for 2010 are for a 27% increase in earnings and then another 20% in 2011. Most companies have already cut costs and tightened their belts to the point that they are quite lean already. To meet these expectations companies have to sell more, not just manage cost. If consumers and businesses do not continue to spend at the recent pace, top line growth for companies may not rise as analysts expect. Furthermore, stock prices for many widely traded stocks already reflect a high expectation, meaning there is plenty of room to disappoint.

On the other hand, unemployment seems to be easing. Painfully slow…yes…but moving in the right direction. We just added more jobs in March than at any time in the last 36 months. US GDP grew at a 5.6% annual pace in the quarter ending Dec 09, fastest pace in 6 years. Other data from the housing market, the manufacturing sector and the services sector is also looking better. So is the inflation picture with CPI and PPI well contained so far, meaning the Fed is not likely to raise interest rates anytime soon.

Finally, the S&P 500 is now trading at 15 times analysts expectations for 2010 earnings. That is not cheap, but is not expensive either when compared to the average of 22 times analysts expectations over the last 30 years or so. Bottom line: I will not be surprised if some catalyst breaks the 6 week uptrend we have enjoyed recently, but I don’t expect a full 10% correction. Using option strategies and adjustments to hedge your positions makes a lot of sense, especially when we are at a critical point in the markets and uncertainty abounds.

Charan Singh
OptionsANIMAL Instructor

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