July 10, 2010: Here Comes Q2 Earnings
July 10th, 2010
Splashed all the media are this weekend are declarations that stocks just logged their best week in almost a year. The major averages (Dow 30, S&P 500, NASDAQ 100, and Russell 2000) posted gains over the past four trading days (last Monday was a holiday) ranging from5% to 5.42%. In actuality, the majority of those gains were made on Wednesday after the pre-market news that State Street (STT) guided earnings for Q2 higher than analyst estimates (sees Q2 earnings of $0.87; est. was $0.72). The company reports actual Q2 earnings on July 20. STT guidance prompted a snap-back in broad market sentiment and quickly fueled intense optimism for Q2 earnings in general.
It was indeed a good week….now what?
Beginning in late April (April 26 in most cases), the broad market began a corrective process that is still on-going by any technical measure. Looking just at the four major averages above, the indexes remain below 38.2% upside retracements of the declines that began in April and range from 14.6% (Dow 30) to 21.2% (Russell 2000). Also, the indexes remain below their respective 200 Day Moving Averages. Below are both levels for the averages.
Dow 30: 10,242, 10,365; S&P 500: 1091, 1112; Naz 100: 1837, 1840; Ru 2000: 648, 638.
While 5% rallies for a week are certainly welcomed news after the brutal declines of the preceding ten weeks, there are two important pieces of data to consider as we move into Q2 earnings season.
- Investors are now expecting very strong earnings and the season kicks off next week. Given how sharp of a broad market reaction followed STT’s positive earnings guidance, if earnings AND guidance don’t exceed expectations, investor sentiment could swing back to the negative in a hurry.
- July 2009 produced the largest number of bank failures of the year and the second half of the year produced 68% of the failures of the year. Last week, four more banks were seized by FDIC regulators which brings 2010’s closure tally to ninety at an insurance fund cost of $17.77 Billiion.
How the broad market responds to actual earnings news as earnings season begins and the important technical levels above will likely set the tone for at least the next few weeks.
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