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How earnings season is shaping up for the stock market

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Earnings season is coming and it may be more interesting that first thought. Barron’s is reporting 96 S&P 500 companies have lowered expectations and guidance for the fourth quarter. This is the largest number since 2001.

At work may be that S&P 500 companies as a whole generate around half their revenue overseas. 14% of that from Europe which arguable is in recession now; and China’s slowdown has impacted sales of US international corporations.

On the other side of the coin 27 companies in the S&P 500 have raised guidance.

For 2012 overall analysts are expecting S&P 500 earnings to climb 10% to 107.30. Things look better after the third quarter of 2001 when 70% of S&P 500 companies reported earnings that beat analysts expectations.

Stock prices are not expensive based on that 2012 earnings estimate of $107.30 on a PE basis as that is only a 11.7 PE.

There is common agreement among analysts that if the financial sector can move up it will take the general market with it. Before the crash of 2008 and debt crisis aftermath the financial sector often lead the market. In fact, it was fairy hard for the general market to advance without the financial sector. (The same goes for the tech stocks in the NASDAQ market.)

So far the global response to the debt crisis has been more of a band aid approach and the stocks have correspondingly chopped up and down without any real trend. Should something be done that has the ring of a more permanent fix it may move the financials and thus the general market into a trend that will allow for safer more profitable trades.

As January goes, so goes the year, according to the Stock Trader’s Almanac. And as the first five days of month go, so goes January. As usual with many of these old saws the devil is in the details – if you care to look.

Since 1950, the S&P 500 has started January with five day gains 38 times. Full year gains followed the positive starts 33 out of those 38 years (87% of the time). When the market started a new year with a loss for the first five days of January, full year performance was mixed. Stocks rose 12 times and fell 11 times for an average annual gain of 0.2%.

During presidential election years, the first five days indicator has a 13-2 record. Negative starts are hardly predictive with a 50-50 record.

Using the full month performance for January as barometer for full year returns confirms the mixed results. January gains are good, leading to full year increases in the S&P 500 88% of the time. Sam Stovall at S&P Capital IQ says, “January declines led to negative full year performance just 56% of the time since 1945 however”. Stovall also determined that presidential election years make positive January Barometer readings more accurate, but not the negative barometer readings.

So much for old saws, but you can still root for a good year.

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