Earnings Season

Finally. Greece has been offered a lump-sum loan by the European Union. It’s been obvious for weeks that this needed to happen. Now that it has, at least we can look forward to not reading about this saga every day.  


A month ago, this Greek bailout might have been a significant catalyst for the stock market. Now, after the seemingly endless back and forth, there’s not much impact beyond a rally for Greek banks and bonds.   


From a trading perspective, the Greece news is being overshadowed be earnings season…   


It seems like 4Q 2009 earnings just ended, but Alcoa (NYSE:AA) kicks off 1Q 2010 earnings today after the closing bell.   


Overall, earnings are expected to post a 30% gain over last year. But given the “bullet-proof” rally we’ve enjoyed over since mid-February, it’s reasonable to wonder how much of the expected earnings growth has been priced into current valuations.   


Bloomberg is reporting that the price of put options (downside bets on stocks) have increased compared to call options (upside bets on stocks). That indicates that investors are buying put options to hedge their stock portfolios against a decline in stock prices.   


Now, that investors are taking action to protect their gains does not mean a decline for stock prices is at hand. But it does suggest that investors are getting a little nervous as we head into earnings.  


Over the last year, earnings have consistently surprised to the upside as companies have handily beaten analyst estimates. The big question now is whether companies will continue to beat expectations.   


I suspect that, if companies do not, we will see a correction for stock prices.   


I’ll be watching the banks as my “canaries in the coalmine.”   


It’s an old saw that financial stocks lead the market. That’s certainly been true over the last year. We’ll know if that trend continues this week. JP Morgan (NYSE:JPM) reports on Wednesday, Bank of America reports on Friday. Citigroup (NYSE:C) reports next Monday.   


I checked in with TradeMaster’s Jason Cimpl this morning for his take on the stock market. Here’s what he’s telling his readers:   


Over one month ago I cautioned that while the market will continue to make higher highs, the recent market rally lacked consolidation. That activity is unhealthy for the larger bullish trend. During any rally, indices need to take a breather from time to time and give more buyers the chance to enter a position before the larger trend resumes. In extremely bullish momentum phases, like the past several months, money tends to enter new positions on the way up as opposed to on pull backs, which limits the upside and exposes those positions to short term losses when the pull back occurs.   


The scenario I currently favor calls for a pull back within the month, a "sell in May" phase. In that situation, stocks will regroup and pull back to 1030, but form a healthy base pattern until August.   


So, how does Jason continue to make upside gains even as he keeps an eye out for a correction? He’s holding biotech stocks and buying energy and gold stocks.   


In fact, in his weekly trading video for his readers, Jason highlighted two small gold stocks that are breaking higher. He just added one to the TradeMaster Daily Stock Alerts’ trading portfolio. This $4.60 gold mining stock is up 5% today, and is a perfect way to play the market’s uncertainty.  

To top