Hi everyone,

On Friday the DOW closed just shy of the psychological 11,000 mark at 10,997. In fact as you will see from the DOW JONES Cash Rolling chart below it actually pushed just above the 11K mark in after hours trading. The DOW, along with the S&P 500 and the Nasdaq have all been on quite a run over the last couple of months as the markets shrug off worries about Greek debt to continue to push higher week after week. With the DOW closing up 0.5% this week it has now closed up 9 of the last 10 weeks! The big question now is, with the Q1 earnings season kicking off later today with DOW component Alcoa reporting after the bell, whether or not results can surprise enough to the upside to keep this rally going.

DOW Weekly Chart - Up 9 of last 10 Weeks (Click to Enlarge)

How Will Markets React To Earnings?

With a 12% run-up in the DOW since it’s 2010 lows on February 5th and a 70% run-up since it’s 2009 lows on March 5th it is going to take some seriously good results for the DOW and other indices to push on past the 11,000 level and make the move towards the next big resistance around the 11,800 level.

Analysts seem to be split on how the markets will react over the next 3 weeks as results come in each day. Some are arguing with the day sitting at the 11,000 level and after such a massive run-up and with equities clearly overbought right now a 5-10% pull-back is on the cards and regardless of how good, bad or indifferent the results are the market will take this opportunity to sell off. Excellent results could see a “sell the news” reaction providing traders an opportunity to take some profits after a great 12 month run. It is worth noting that during the last earnings season stocks actually lost 3% as investors sold  equities despite very strong results that easily beat what the Street was looking for with 72% of companies beating analyst estimates for the 4th quarter.
Similarly if results disappoint and fail to meet analyst consensus this will point to a US economy that is not out of the woods just yet on the recession front and is likely to leads to a fairly nasty sell-off with talk of “a double dip recession” surfacing once again.

DOW Touches 11,000 (Click to Enlarge)

The bulls on the other hand are holding out for another set of excellent results which will help reaffirm the argument that for the US the worst of the recession is behind them. Strong results, especially from the retail sector, when combined with the positive employment and housing data that has been coming through over the last few months could well act as the catalyst for the money that is still sitting on the sidelines to be put to work. According to Thomson Reuters the expectation is for S&P 500 companies’ first quarter earnings to rise 36.8 percent from the same quarter a year ago. Today’s news that EU finance ministers have reached agreement on a €30 billion loan facility for Greece should be another catalyst for the markets this week, removing one of the big uncertainties hanging over the markets for the last couple of weeks. As an aside on this €30 billion bailout, sorry I mean loan, for Greece I read earlier that Ireland has agreed to lead €450m of it to Greece if required at an interest rate of 5% which is actually slightly higher than the rate we can currently borrow at, so we might actually make money on this one if the Greeks come knocking!

But back to earnings season and how the markets might react. Personally I’m not sure what way it will pan out, the trend is definitely higher so I don’t think I’d be rushing in to short the market. At the same time the markets are certainly over-extended and a would not be surprised to see a short-term pull-back of 5% or so. If there is to be a pull-back a couple of levels that might act as support would be firstly the 20 day moving average at around 10,850. Since the market’s big 1.5% jump on February 16th the 20 DMA has acted as support when called upon, albeit only twice since then given the strength of the market. If the 20 DMA does breakdown then look to the January highs at around 10,730 and after that look to the 50 day moving average to come into play at around 10,550 as possible areas of support.

Holding Positions Over Earnings

Many traders argue that it’s not wise to hold open positions over earnings as it’s a time when stocks are prone to gap up or down depending on how the market reacts to the results just released. This is good advice and I’d definitely recommend not opening new positions in a stock which is due to release results in the coming days. Likewise if you already have positions open in which you are nursing losses but holding out hope that the upcoming Q1 results might rescue your trade this too is a very risky approach to take. I’d suggest closing out your position in advance of the upcoming results otherwise you could end up with a small loss becoming a much larger one. If on the other hand you already have long positions open which are in profit then these are the types of trade I would consider moving up my stop up on rather than close outright in advance of the results. With these positions there is still the risk of results disappointing the market a the stock gapping down below your stop but you are also giving yourself the chance to take part in any earnings surprise to the upside. It’s this last approach I’ll be taking with long positions I currently have open in Apple, Verizon, Yum and Ford which I have had open for several weeks / months at this stage and all are doing quite nicely. Over the coming days I’ll tighten up my stops so that if results do disappoint I should at least close out with some profits. Hopefully a few will surprise the market with strong results and provide some nice gap ups!

Where To Get Earnings Dates?

Before I finish up this post I wanted to touch on a question I received from a regular reader of the blog a few weeks back. Declan asked if I could cover something on where to find out what results are coming out per industry. I’m not too sure on the “per industry” part as from what I can see from my research on this the companies reporting each day over the 3 week earnings season seem to mixed across all industries. For example up next week we have Alcoa (Materials), Intel and Google (Tech), JP Morgan and Bank of America (Financial), YUM (Consumer) and GE (Conglomerate) all reporting.
So what’s probably more important for traders is for them to be easily able to find out when a stock they currently have an open position in (or one they are thinking of opening a new position in) is due to report. For this type of info I have found a site called Earnings Whispers to be one of the best out there. It’s simple to use, just bang in your ticker into the “Get Whisper” box on the homepage and click “Get”. They return a lot of very useful information such as the results release date, consensus estimate and the earnings whisper for EPS. Another useful tool on the site is the Earnings Calendar, which will show you day by day which companies are due to release earnings results. So over the next 3 weeks or so it could well be worth your while taking 2 mins each morning to click on the earnings calender for that day to see whose due to release. If anyone has any other good websites they use for earnings release dates please use the Comments box below to let us know.

Right that brings this post to an end.
Until next time,
Happy Trading,
SpreadTrader.ie : -)