Beware - Q1 Earnings Distortion

George Brooks  |


   Wednesday, I was looking for the kind of selling climax Monday that would clear the air. It didn’t happen Monday, but it did Tuesday. It was not a huge flush volume-wise, but impressive as a reversal.

   Wednesday’s sharp rise suggested last week’s selling was overdone, that investors believe a spring rebound in the economy and stock market is a strong probability and don’t want to miss a big up move if it happens.

   While the Street is still concerned about the over-valuation of Tech stocks, slower growth in China’s economy, the Ukraine/Russia crisis, angst about Q1 earnings, and the U.S. economy, adversity has not prevented this bull market from advancing in the past.

   While a worsening of any one of these negatives could turn the market lower, the current bull market has defied more serious negatives in its five-year existence. The main difference today is that the market is much higher than in the past.

   Talks are underway in Geneva between Russia, Ukraine and European officials to head off further violence in Ukraine. That’s the good news, the bad news will likely be when they break up with nothing accomplished leading to uncertainty.


   The market will simply have to take the bad with the good as Q1 earnings are reported in coming weeks.  A disappointing report has IBM trading down $8.40 forty-five minutes ahead of the open. That will lop 54 off the DJIA at the open. On the other hand, Goldman Sachs (GS) is up $3.43 in pre-market trading which will add 22 to the DJIA.

   Understandably, the DJIA and S&P 500 have posted a more impressive rebound this week than the Nasdaq Comp. and Russell 2000 as investor interest has shifted to higher quality. That divergence will continue for a while, but I do expect the latter two to catch up in time.


   The market will be hard pressed to post a big gain today as 25 S&P 500 companies report earnings today.

Resistance:  The DJIA should have trouble crossing 16,516 (S&P 500: 1,872, Nasdaq Comp.: 4,112) today.

 Support is “iffy” at DJIA: 16,366, S&P 500: 1,856, Nasdaq: 4,060.

   The market has taken the first steps toward a spring rebound by stabilizing and posting a gain. It will need a boost from the economy, namely a surge in consumer spending and a rebirth of interest in the housing industry. Mortgage rates are historically low and with the inventory of houses on the market low, house prices rising. Decision time.

Investor’s first readDaily before the open

DJIA:  16,424                                                                           

S&P 500: 1,862

Nasdaq  Comp.:4,086

Russell 2000: 1,131

Thursday, Apri1  17, 2014      9:14 a.m.



     At key junctures, I technically analyze each of the 30 Dow  stocks seeking a reasonable near-term downside risk, a more severe risk and an upside potential for each, then use the Dow “divisor” to convert that data back into the DJIA.

    Currently, a reasonable risk based on present circumstances is DJIA 16,157, a more severe risk is 15,888 and the upside is 16,722. The latter would have to come after the current slide has turned the corner.



   One of the Stock Trader’s Almanac’s great discoveries is the fact the stock market’s performance during thesix months between November 1 and May1 is far superior to the six months between May 1 and November 1.* The Almanac  refers to it as the “Best Six Months.”

   Over of the last 25 years, the “Best Six Months” has produced 19 up-years, 3 flats and 3 downers. The best years averaged gains of 11.8% with the best year up 25.6% (1998 – 1999).

   Over the last 25 years, there have been 14 corrections ranging between 6% and 16%, but more than one correction of this size during the Best Six Months was rare.

   In 2002 there was a 6.2% correction in January and a 6.5% correction in March/April. In 2003, there was a 7.0% correction in Nov. 2002/December 2002 and a 12.9% correction in January/March of 2003.

   So far, the DJIA is ahead 5.4% since October 31, 2013 even with a 7% correction in the interim. While the rout of the Techs has driven the Nadaq Comp. down 6.8% in seven days, the DJIA and S&P 500 have dropped 3.6% and 4.3% respectively. Another correction exceeding 6% in either of these two is of course possible, but unlikely.



   Russia’s annexation of Crimea was only the first step in  President Putin’s power grab. Undoubtedly, he plans to stir additional unrest in sections of Ukraine where Russian speaking people are in great numbers. A military response by Ukraine would give him reason to invade Ukraine to protect pro-Russians and that would have an impact on global markets, which are vulnerable to begin with.

   One of the factors that turns a  normal market correction of 3% to 5% into a much bigger correction (5% to 12%) is new negatives that hit the market when it is about to rebound from the 5% correction. A sharp escalation in the Russia/Ukraine situation could be one of those factors.

 SELL in MAY and Go Away ?

   You will soon read about that seasonal phenom in the press and newsletters. Essentially, it is the backend of the “Best Six Months”* to own stocks (November 1 to May 1). Obviously, the message here is of the two six month periods, it is the worst for stocks. More in coming days.

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   I don’t think it can be taken as a “given.” On far too many occasions over the last 26 years a May top was followed by a decline, but within months (well before Nov. 1) the market rallied sharply. I see it more as a trading opportunity – i.e. “Sell in May,” but be ready to buy back after a plunge.



   Manufacturing output, new orders and exports are up for the eighth consecutive month, suggesting its recovery is real, though not yet robust. Our economy has

scratched and clawed its way out of  a horrendous recession without help from Europe. Obviously, a recovery there stands to accelerate the pace of our recovery here.

   The IMF released its latest global economic forecast as it meets in Washington this week. It sets global economic growth at 3.6% in 2014 and 3.9% for 2015, up from 3% in 2013.


 HOUSING STOCKS – A spring rebound in the economy can hardly occur without a renewal of interest in housing stocks. A big jump in mortgage apps and refi’s for the April 11 week suggests a rebound, as does a 2.8% jump in March Housing Starts..


Beazer Homes  (BZH)   Friday: $18.99

PulteCorp ($PHM) Friday: $18.90

Toll Brothers (TOL) Friday: $34.86

KB Homes  (KBH) Friday: $16.65

DR Horton  (DHI) Friday $21.86

CONCLUSION: This group is still a good read on the potential for the economy to rebound. Good relative strength vs. the overall market would be bullish for both the industry and economy. The latter needs strength in housing to rebound significantly, since  so many products key on decisions to buy a house. All five posted modest gains yesterday. Worth noting, the yield on the 10-year note has been dropping.



   Four days of trading precede Good Friday, though the Leading Economic Indicators will be released Friday. While it may be too early to get a read of the housing industry’s recovery from the winter doldrums, the Housing Market Index is reported at 10 a.m. Tuesday and MBS Purchase Apps at 7 a.m. and Housing Starts at 8:30 a.m. Wednesday.

   For detailed analysis of both the U.S. and Foreign economies along with charts, go to Also included is an explanation of each indicator. If you want to know when the next Employment report or any other key report will be released that info is also there under “event release date.”


Retail Sales (8:30): Up 1.1 pct. Mar. after gain of 0.7 pct. Feb (rev. up from 0.3)

Business inventories (10:00): Moderate build in Feb. in spite of weather. Good vs. 0.8 pct increase in sales. Inventory/Sales ratio is 1.31 Feb..


ICSC Goldman Store Sales (7:45): Down 0.3 pct. in Apr. week, but y/y is +2.3 pct.

Consumer Price Ix. (8:30): Up 0.2 pct. in Mar. vs. 0.1 pct. Feb and a forecast for  a 0.1 pct. gain.  Year/year is up 1.5 pct.

Empire State Mfg. Ix. (8:30): Index is 1.29 so far in Apr. vs. 5.61 in Mar.

Housing Mkt.Ix. (10:00): New home market still flat with index at 47, below breakeven 50 for third straight month.


MBA Purchases Apps (7:00): Jumped 1.0 pct.  for Apr. 11 week, Refi’s up big 7.0 pct.

Housing Starts (8:30): Mar. up 2.8 pct. vs. gain of 1.9 pct. Feb..

Industrial Production (9:15): Feb up 0.6 pct. vs decline of 0.2 pct. Jan..

Beige Book (2:00):


Jobless Claims (8:30): Rose 3,000 tp 304,000 in the week end3ed 4/12.

Philly Fed Svy (10:00):


Market Closed, banks open

Leading economic Indicators (10:00):



Mar 31 DJIA  16,323  CONFIDENCE Calls the Shot – April Opportunity ?

Apr 1   DJIA   16, 457 Rounding Top or Base for Big Upmove ?

Apr 2   DJIA   16,532  Market Wants to Run

Apr 3   DJIA   16,573  What the Market Really Needs Now is……

Apr 4   DJIA   16,572  New Highs Need to Hold Today

Apr 7   DJIA   16,412  Sell Off to Create Trader’s Buy

Apr 8   DJIA   16, 245 Buying Opportunity Possible Early Monday

Apr 9   DJIA   16,256  April Opportunity Looms

Apr 10 DJIA   16,437  Swing Factor: Q1 Earnings, Spring Rebound

Apr 11 DJIA   16,170  Computer Selling = Scary Plunge = Opportunity

Apr 14 DJIA   16,026 Spring Surge Still in the Cards

Apr 15 DJIA   16,173  Selling Climax Still to Come ?

Apr 16 DJIA   16,262  Reversal – the Start of the Spring Surge ?

*Stock Trader’s Almanac

A Game-On Analysis, LLC publication

George  Brooks

“Investor’s first read – an edge before the open”

Investor’s first read is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager, and writer. Neither Game-On Analysis, LLC, nor George  Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized investment advice or as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk. Brooks may buy or sell stocks referred to herein.


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