Rev Shark:
Balance Your Expectations as Earnings Season Arrives
4/11/05 8:39 AM ET
A great obstacle to happiness is to expect too much happiness.
-- Bernard Le Bovier Fontenelle
It is that time once again when the focus of the market shifts to quarterly earnings reports. The tricky thing about the impact of earnings reports on the market is that it isn't just about the actual numbers. Most of the numbers will be above consensus estimates, but there will be some bad reports.
The actual numbers are hard enough to figure, but what really will determine the market impact of earnings reports is expectations. A good report may be bad if expectations are too high, and a bad report may be good if expectations are too low.
Unfortunately, expectations are extremely tough to measure. We generally don't know where they are until we actual see some reports and the reaction to them. Only then can we gauge how forgiving the market may be. Do market participants focus on the search for negatives or do they look for positive aspects to the reports? Is all the bad news so fully anticipated that stocks no longer go down? Is the good news undermined by future prospects?
We enter the first-quarter earnings with a depressed and negative market mood and the question we need to contemplate is whether that is a reflection of reality or are market participants unduly pessimistic?
The bearish case is pretty obvious. We have record-high gas prices, crude oil remains a focus, interest rate and inflation pressures, talk about a real estate bubble, the auto industry going bankrupt, and mediocre economic and employment growth. It isn't difficult to understand why the market has been lackluster recently in view of those worries.
The bulls' best argument is that these concerns are so well-known that they have been fully priced into the market already. Rising interest rates and oil prices are not new developments. Those pressures have been there for a while. Shouldn't the market have already discounted them? The bulls certainly hope so, but the market is not acting that way.
Keep in mind that we have very poor technical conditions in the indices right now. The bears are in control and the burden of proof lies on the bulls. If the mood is right and expectations low, earnings can benefit the bulls, but it is going to take some real buying to turn the tide. The bears have the wind at their back and as we saw last week even a sharp drop in oil was not enough to scare them off.
We have a positive open as crude oil is down again. Overseas markets were weak, the dollar is down and gold up.
Gary B. Smith:
