So far about 80% of companies reporting earnings this quarter have exceeded analyst expectations. This is the second consecutive quarter now that this is occurring. Remember back in May how I said that analysts actually lowered expectations for future earnings even though earnings exceeded their 1st quarter expectations. I mentioned how this was a form of anchoring....a psychological trap that investors fall into which occurs when investors/analysts fail to adequately adjust their posture when new information conflicts with it....basically a form of denial. This is no longer occurring. Forward earnings estimates for the S&P have been rising since June but obviously not fast enough because so far earnings reports are blowing past expectations.
There's good and bad news to this. The good news is that even though expectations are now rising analysts may continue to be behind the curve constantly underestimating earnings. They did this on the way down for the entire year of 2008 whereby they constantly overestimated earnings again and again even as they lowered expectations. As expecations get adjusted so do stock prices.
The bad news is that the easy money has now been made on this trade. As a result of Intel and Goldman blowing out numbers, the surprise factor won't be as large and expectations I'm sure are going to be adjusted upward in a big way. This can set the stage for massive disappointment if this economic bounce we are seeing is just an inventory re-stocking blip i.e. a snap back from the standstill the economy was at back in the fall. But the burden of proof is on the bears because the economy has bounced and earnings are on the mend. Can you see now why it has been so difficult for the bears to gain traction on the short side? Yes, jobs are still being lost but that's a lagging indicator. I've read some comments from a few pundits who claim that job losses may now be a leading indicator. This is nonsense if you ask me and just another form of denial from wrong way bears that have egg on their faces.
The question I ask myself now is where will the new jobs be created? In the past this has always been asked by people whenever there was a recession. Nobody really knew but somehow they got created. You had to have faith and guess what...it worked....the jobs came. In the last downturn, housing construction and finance jobs were the source of growth...this time around they won't be....perhaps with infrastructure spending planned they will come from there but is that really a source of job creation that will power the US to regain it's former self of being the leader of innovation? I don't think so. Some other source better be there otherwise it's going to be tough slogging for several years a la Japan post 1990.
Right now we are seeing the tech sector take charge...so perhaps the market is signaling that tech is once again going to lead and so maybe the jobs will be created there again. One very bullish prominent theme that existed just prior to this debacle was the coming explosion of the consumerism from developing countries, China in particular, as the poor transition to the middle class. This was supposed to provide for tremendous growth opportunities for companies all over the world. The problem however, was that the poor was transitioning to middle class by way of providing goods and services to overindulging North American consumers....a trend which was unsustainable. They suffered as we suffered but now with China taking matters into their own hands with their stimulus efforts perhaps they are showing signs of a self-sustaining economy. It's far too early to determine if that's the case though. Anyhow, I digress.
I always take my cue from the market. If I believe a particular theme may play out, I want to see signs that the market is agreeing with me (basing or uptrend price action) and I want to find low risk entry points. I want to make sure that my thesis is not an overcrowded trade because that never works. An example of an overcrowded trade has been the constant failed bottom picking of the Natural Gas sector. Several people are making the argument that the price of Natural Gas is undervalued...it probably is but that hasn't stopped the sector from it's sickening slide and many people have been run over by it. Another example was shorting bonds in the fall last year. Bond bears got ran over big time before bonds topped out early this year.
With the market closing at 951 today it has cleaned out yet another cohort of bears. I don't think there are much left now to squeeze. The market is almost maximum ST overbought....don't get me wrong here....it's already extremely overbought ST and ripe for a pullback...I'm just saying that I have seen it get even more ST overbought...namely early January of this year.
The bottom line is that it would be foolish to be long here for the ST aside from possible intraday scalps. Sure, we can squeeze higher but the potential for profit taking on either a sell on the news reaction or any sliver of a negative surprise is very high and like I said, I don't think there are too many weak bears left to squeeze.
I suppose a break of 960 on the SPX would cause ultimate capitulation of whatever weak bears remain and whatever sidelined money itching to get back in is out there given that this would be a new YTD high for the SPX. The NASDAQ has already made a new YTD high and this has been the leading sector but the fact that is up 9 days in a row is silly...but silly or not, never show a lack of respect for the market because it can and will do the impossible. Anyone who thought 6 days in row was silly and shorted as a result is trapped with losses.
We probably will finally see a down day tomorrow on a "sell the news" reaction to Apple's earnings which will probably be quite good. Will I be suprised if this doesn't happen?...yes and no.
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