How Will Earnings Be Received?

The next couple of weeks will be interesting to say the least. Sure there will be continued talks of the bailout, main street, blah blah blah, but in the midst of all this earnings are still to be reported. The real question is how will investors receive these earnings reports?

Many traders opt for the pre-earning buzz. Meaning they will buy stocks or sell stocks based on what kind of earnings will be announced; however, the uncertainty in this market condition has all but killed that play. It seems like every day investors react differently to the same type of news, and this is sure to carry on into earnings season.

In order to understand some of this better, lets take a look at some companies that kick off the week:

Alcoa (AA) is expected to post a profit of $0.54/share with revenue of $7.2 billion. To many that may seem like some good stuff. If somebody can pull out positive in this economy, then they must be doing something good, right? On the other hand, if you take into account that those are both down 15.6% and 2.1% down respectively, from same quarter last year, then it might not look so sunny.

There are many other companies that will post profits, although lower than previous similar quarters. We can also look at General Electric (GE) and Ruby Tuesdays (RT). In a market where people sell on good news, any sign of slow growth will seem to shake people. Expect all these type of companies to be hit heavily UNLESS…

When it comes to these type of earnings it is important to listen to the call, report, or whatever. Often times, if a company forecast some sort of “future growth,” then that can spark a mini-rally for that particular stock or sector (depends on authority of company).

Our main concern our companies expected to exceed expectations:

While these type of companies that will report less profit are more predictable, we really want to look at companies expected to exceed expectations. Costco (COST) and Yum Brands (YUM) are both projected to report higher numbers than a year ago. Normally, you would see rallies in these stocks before and/or after earnings are reported, but this market condition leaves it tricky.

Why? Because investors are looking for the negative. The economy is indeed slowing down. Yum Brands may report higher numbers than last year, but if might forecast a retraction for future reporting periods. Depending on the authority of the company, this can mean disaster for the entire market.

In the end, these uncertain conditions most investors are feeling will probably result in highly unpredicatble reactions. What investors might respond bullish to on one day, they might act bearish on the next. Just look at the bailout reactions last week. Throw all the unrelated news about the economy on top of that, and you might be better just rolling a dice.

While I don’t necessarily recommend to stay in full cash, but rather opt for solid long term plays, if you are truly a risk junky looking to take these earnings head on, then make sure to pay close attention to any news pertaining to your certain companies and sectors and make sure to keep your stop losses tight.