Earnings Theme-Watch Starts

 | Jan 16, 2013 | 7:28 AM EST
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"Blessed is he who expects nothing, for he shall never be disappointed." -- Alexander Pope

The major earnings reports for the fourth quarter start to roll out this morning and continue for the next three weeks. The big question is whether expectations are too high or too low and whether market players will be looking for excuses to make some moves.

Expectations were quite low for the third-quarter reports. but we still sold off and suffered a rather severe market pullback from mid-October to mid-November. We eventually rallied on hopes of a fiscal cliff deal, but we are at a juncture now where the focus of the market is going to shift to earnings and the next big political event. which is the debt ceiling issue.

The bears have been anticipating that we are going to run into some rocky times because of poor earnings and another ugly political battle, but they have been dead wrong so far. The indices have seen some very strong underlying support and have been able to ignore the ugly action in Apple (AAPL), which led this market for so long. Upside momentum has been contained, but there were still 300 stocks making new highs yesterday, which tells us that sentiment remains quite positive.

Speaking of sentiment, the bears keep arguing that this market is just too complacent and that investors are ignoring a slew of negatives that are going to bite them at some point. Probably so, but the key phrase here is "at some point." It is all about timing and if you are trying to time this market on some generalized views about the level of sentiment you are going to have a very hard time.

With earnings season now upon us we will have to watch closely to see what sort of themes evolve. Will companies blame the fiscal cliff issue for poor results? Will market players be inclined to sell bad news, buy good news or vice versa? Will guidance be murky due to continued economic uncertainty?

Typically the theme becomes clear pretty early and then picks up steam as earnings season continues and small stocks start to report. The good news is that there are always some new leaders of interest and some good trading action due to increased volatility.

The bears continue to predict that the market is going to fall apart at any moment, but, as usual, their timing is off and they are already sitting on losses.  My view of the market continues to be that the bulls have the benefit of the doubt until there is some price action to the contrary.

I'm not a raging bull as I'm finding it difficult to find many great setups at this point, but I see no reason to fight the trend. I was impressed by how well the market recovered from the soft open yesterday and by how well the small-cap stocks are acting.

We have a little weakness in the early going this morning and JPMorgan Chase (JPM) is down slightly on what looked to be a pretty good earnings report. We'll see what happens on Goldman Sachs (GS), but it looks like a little sell-the-news action is brewing.

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