With earnings season well under way one very disturbing trend is taking shape. Despite the majority of companies beating estimates, the size of the beats and the market reaction to those reports has been less than stellar.
In fact, the clearest way to trade stocks during this season is to be on the short side of the equation. Sure there have been impressive reports that have been rewarded with significant stock gains including last week’s enormous beat of the number by technology stalwart, Apple, but the big winners have been noticeably absent thus far.
Will that trend continue as earnings season progresses?
I think so and there are a number of reasons for that not so welcome news to bullish traders. For starters stocks overall have moved greatly higher in January taking away potential momentum for further advances. With many suggesting that the economy, without the help of greater stimulus will eventually hit a wall.
So far that wall has been elusive to the bears, but I strongly believe in a reversion to the mean. If you assume stocks will likely appreciate in 2012 by 10% or a tad more, January’s move has captured nearly half of those gains.
The bullish response to that dynamic might suggest that estimates of performance for the year might be too low. Sure, but to achieve significantly higher gains than what is already is projected will require corporate profits to be strong and getting stronger.
The preponderance of those companies already reporting does not suggest in any way that profits will be booming in 2012 as compared to current expectations.
When I trade stocks I like to do so when the odds of success are in my favor. Right now the odds are pointing to stocks in general retreating. The odds also suggest that the big winning trades will continue to be on the short side of the market.