Success is following the pattern of life one enjoys most. --Al Capp
After a technical breakdown and a routine oversold bounce, the market is at a particularly interesting juncture as we head into earnings season. Google (GOOG) kicks off the confessions tonight followed by JPMorgan (JPM) and Wells Fargo (WFC) tomorrow morning before the onslaught next week.
Earnings will help to determine whether the recent downturn gains momentum or whether we bounce back and resume the strong uptrend that has been in place since last October. While the technical picture looks worrisome, the market has had a strong tendency in the last few years to right itself quickly just when it looked ready for a deeper correction.
Whatever the market ends up doing, you can be sure that earnings reports will receive the credit for the move. The important thing isn't the actual numbers but the market's reaction to them. Strong numbers that are sold may actually be more of a negative than weak numbers that are sold, as it indicates that buying power is being depleted.
Google will be a particularly good test of the market mood. The company disappointed last quarter after surprising to the upside in the third quarter of 2011. Expectations are mixed as Google has pulled back a bit in the last few weeks.
The big positive for the bulls is that we really have not had a disappointing earnings season since the market bottomed in March 2009. Companies have consistently posted strong numbers and the reaction has been positive. Last quarter we had more soft guidance than in a while but it was quickly shaken off in most cases. In fact, if you bought a stock that gapped down on poor guidance, you likely did well as they generally bounced back quite fast and turned positive.
The bears' best argument at this point is that the technical picture looks quite susceptible to another rollover after we work off the oversold conditions that are producing a bounce. Right now, the technical picture suggests that market players will be looking to sell into earnings reports. If there are disappointments, it won't take much for the downside momentum to grow fast.
What I struggle with in this market is the potential for another V-shaped bounce. Prior to the low in March 2009, I'd be leaning much more bearish in a market with this technical formation, but that simply hasn't worked in the last few years. The best move is to become bullish quickly after a drop and a bounce, as we tend to go straight back up.
In the old days, even if we did quickly bottom we would churn a bit and see some back-and-forth action before we moved back up. In this market, we hesitate little before moving straight back up.
For those reasons, I'm ambivalent about anticipating further downside momentum, even though that is what the traditional technical patterns suggest.
We shall see what earnings season brings. I'm looking for mixed action today after the reaction to weekly claims. I'll be looking for buys, but my time frame will be short term.