Limited Bang for Earnings Reporting Buck

October 21, 2009

From third quarter earnings reports, it appears as if we're seeing a tired market. However comparisons should look better in the fourth quarter, indicating that this pause in action is apt to be one that refreshes, as opposed to one that reverberates, as a strong sell signal.

Last week Intel provided the stock market with a nice boost after posting third quarter earnings and guidance that were much better than expected. Lately, though, it has become increasingly difficult to impress the market.

Since the Intel-related surge last Wednesday, the S&P 500 has slipped a point and is indicated to dip about 0.3% at the start of today's trading.

The flat-footed stance has been noteworthy given that the vast majority of reporters following Intel have surpassed consensus estimates, oftentimes with ease.

Freeport McMoRan (beat by $0.73), SanDisk (beat by $0.49), Wells Fargo (beat by $0.19), Eli Lilly (beat by $0.18), Morgan Stanley (beat by $0.11) and Northrop Grumman (beat by $0.11) are among the latest in a line of companies that have given the stock market ample reason to rally.

The market, however, looks as stirred up as Queen Elizabeth at a Rolling Stones concert.

To be sure, there hasn't been a lot of rocking and rolling in the wake of the earnings reports like there was during the second quarter reporting period.

The financial sector, in fact, has been underperforming the market, declining 0.4% since the close on Oct. 9 versus a 1.8% gain for the S&P 500. A lack of participation from that key sector has not gone unnoticed.

Basically, it appears as if we're seeing a tired market. With the reports coming in like they are, though, and the realization that comparisons should look even better in the fourth quarter, this pause in the action is apt to be one that refreshes as opposed to one that reverberates as a strong sell signal.

We could back up a bit more from here given the heightened bullish sentiment (a contrarian indicator) entering the week and due to the nervousness of weak-handed longs who were expecting more bang for the earnings reporting buck.

Still, we suspect there remains a healthy base of potential investors looking to buy on weakness, which should continue to keep pullbacks short and/or shallow in the near-term.

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