Q3 Earnings Looming - First Downer in 11 Quarters

George Brooks |

MarketWatch.com carried a good article today “Brace for Bleak earnings, likely surprise.” S&P 500 Q3 earnings are forecast by FactSet to drop2.6%, breaking an 11-quarter streak of quarterly gains. Some 80 out of 103 S&P 500 companies providing “guidance” (78%) forecast earnings coming in below Wall Street estimates. This contrasts with the fact 72% of S&P companies that have beaten estimates over the last four years.

So far this year, earnings have beaten the prior year by 6% in Q1 and Q2, far below double-digit “beats” in the preceding 9 quarter. Granted, coming out of a horrendous recession, year-ago earnings are easy to beat, but become more difficult in subsequent quarters. It stands to reason that a flat or down quarter will eventually occur.

What does this mean today?

Investor’s first read - an edge before the market opens
DJIA: 13,575.36
S&P 500: 1461.40
Nasdaq Comp.: 3149.46
Russell 2000: 844.65
(Friday, October 5, 2012 (9: 09 a.m.)

No analyst or money manager is unaware of the strong likelihood Q3 earnings will be a ho-hummer, even stink.
The question here is, has the stock market discounted Q3 earnings?

TODAY: Looks higher. The DJIA is positioned to attack September’s high of 13,657, the S&P 500 it high of 1474. Yesterday, I wrote that the DJIA 13,600 (S&P 500: 1457) level is what the bulls needed to top decisively to turn this uncertain consolidation positive. The DJIA fell short by a smidge, the S&P 500 topped it by a smidge.

School is still out, but the action in the last five days has been positive. With no attractive alternative for investing cash, institutions are investing cash, even in face of Q3 earnings that are expected to be flat-to-down in reports coming out this month.

DJIA 13,438 (S&P 500: 1438) are still minor support. A break below those levels would lead to a test of more important support at DJIA 13,360 S&P 500: 1430), which is definitely a level bulls don’t want to see broken, since it suggests a drop to DJIA: 13,210 (S&P 500:1420).

ECONOMY: September new hires came in at 114,000 vs. a sharply upwardly revised 142,000 in August. This was in line with estimates, however the Unemployment Rate wasn’t, it dropped to 7.8% from 8.1%. It was expected to be 8.2%.

EUROPE:

One of the reasons the Spain issue is causing angst in European financial circles was highlighted by yesterday by European Central Bank (ECB) president Mario Draghi. He said that the ECB won’t start intervening in bond markets until governments like Spain request a bailout and agree to terms. He also ruled out letting the ECB take losses from Greek debt restructuring.*

FACEBOOK (FB - $21.94):

FB looks like it has traced out a double bottom and possibly a “Head and Shoulders” reverse pattern with the potential of returning to the mid-20s. Pre-open trading has FB’s price below $21.70 support and now testing yesterday’s low of $21.41. That level should hold. Not a good sign if it doesn’t.

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
*Blomberg News

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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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