Q3 Earnings - Discounted or Not?

George Brooks  |

The big question is, has the current level of the stock market adequately discounted the Q3 earnings that will be reported in coming weeks?

The ratio of companies expecting earnings to come in lower than estimates is 4.3 times greater than those that are expected to “beat,” compared with Q2 which was a 3.6 negative to positive, yet the stock market persisted upward after the Q2 reports, according to a Bloomberg News survey.

This “negative” could turn out to be a positive if enough earnings “surprise” on the upside.

So far, two-thirds of the 33 S&P 500 companies reporting have exceeded projections by an average of 4.1%*

Investor’s first read - an edge before the market opens
DJIA: 13,326.39
S&P 500:1432.84
Nasdaq Comp.: 3049.41
Russell 2000: 826.75829.78
(Friday, October 12, 2012 (9:13 a.m.)

Part of the current economic slump is due to a global slowdown, but part is due to the gridlock in Congress and uncertainty of the consequences of $100 billion of automatic spending cuts and $500 billion of tax increase if the fiscal cliff is not avoided December 31. Consumers and businesses are holding back on spending.

Common sense says Congress will do something to avoid a plunge over the cliff. It has some wiggle room, and may find a way to postpone the decisions into 2013, but there again you have an extension of “uncertainty” – bad for the economy.

The DJIA and S&P 500 hit a brick wall yesterday at my resistance levels (13,412 and 1438 respectively) and turned down but didn’t sell off as much as I expected. Three days in a row the DJIA and S&P 500 closed at their lows for the day.
There are sellers out there feeding stock out an any move up.

Odds favor that a break below yesterday’s close (DJIA: 13,326 and S&P 500: 1432) will lead to a further drop to DJIA 13,230 (S&P 500: 1420).

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Jobless Claims dropped 30,000 to339,000 for the October 6 week, probably the reason the market jumped at the open yesterday. The number was so big, analysts want to study the data to be sure there is no distortion as a result seasonality adjustments and states reporting.

FACEBOOK (FB - $19.75):
FB slipped briefly below $20 late yesterday, then rebounded on increased volume. It is struggling to hold above $19.80 where it attracted buying September 26. A break below that level raises the possibility it will test its IPO low of $17.55 posted on September 4.

This is one of those situations that appeals to those guys/gals who buy for the long-haul – 3 to 5 years, so some buying can be expected here on down. Since a lot of holders have short-term losses, it may be a candidate for tax-selling before year-end – additional pressure.

Today: FB trying to stabilize above $19.50. Stock has attracted some buying, but that must get more aggressive to turn it up here. A move above$20 on increased volume is needed.

I don’t own, nor have I ever owned FB. Generally, I don’t recommend or comment on individual stocks. I started covering FB technically after its IPO because on May 21, I felt at $34 it was very vulnerable in face of all the misunderstanding and hype. I warned of a drop to $24-26, which it did shortly thereafter. Following a rally back into the 30s, FB dropped into the low 20s where on August 2, I forecast a low of $16.88. On September 4, it hit $17.55, its low since its IPO at $38.

George Brooks

The writer of Investor’s first read, George Brooks, is not 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. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

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