Tuesday, April 14, 2015

Earnings and Expectations

This week we start the heavy lifting of earnings season as several financials/banks kick off a 4-week period in which most major companies will report their quarterly numbers.  What we will be watching for is how company's share prices react to their announcements. 

By now, some themes have become commonly accepted and seemed to have set the tone for rather mild expectations.  Most companies that miss will say the blame rests primarily in the strength of the US dollar.  However, the dollar's rise is not necessarily new since its almost uninterrupted ascent started last summer.  Analysts have had plenty of time to factor this into their models and shouldn't find it as much of a surprise.

Another theme is the anticipation of a continued decline in earnings.  This would give bears more ammo to further push their narrative of an impending collapse of sorts.  This leads us back to why watching price action is so important.  If the majority expects some weakness in earnings due to dollar strength, energy weakness, cold weather, etc. but we get an overall move higher in prices, that can only be construed as bullish because it means that all of these factors had already been priced in. 

That's the major "what if" we're tracking as we step into this round of earnings.  What if price action tells us that the market has already accepted the anticipated?

For some excellent commentary and analysis on earnings and the market in general, give Jeff Miller's Dash of Insight blog a visit.  He has an incredible grasp of what's happened and what may be in store.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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