Earnings Season Kicks Off In The Face of A Bear Market

The Bears officially came out of hibernation as the Dow Jones Industrial Average and the Nasdaq closed more than 20% below their most recent highs on Wednesday. The S&P 500 is the hold out, dropping 19.3% since its recent highs set in October. Investors that were looking for some relief were disappointed as crude oil continued to set new record highs. The argument over whether speculators are to blame for the recent run-up in oil prices was shot down on Wednesday when the Energy Information Administration reported a larger-than-expected decline in crude inventories. Wednesday’s EIA report is becoming one of the most watched reports of the week. On Thursday, the markets actually made some gains after the unemployment rate in June held steady at 5.5%.

In the coming week, the focus will move away from the Federal Reserve, unemployment and other economic reports and move to earnings season. However, we will get a few economic reports worth noting. The pending home sales index will be released on Tuesday by the National Association of Realtors. The report is widely viewed as a leading indicator of existing home sales because the index tracks when a sale contract was signed, not when the sale closed.

On Friday, Reuters/University of Michigan will report its preliminary measure of consumer sentiment for July. In June, the final reading came it at a dismal 56.4, the lowest reading since May 1980 as consumers felt the pinch of high gas and food prices along with rising unemployment and weak housing market.

Alcoa Inc. (AA | Quote | Chart | News | PowerRating) unofficially kicks off the earnings season on Tuesday when it reports second-quarter results after-hours. Analysts polled by Thomson Financial expect Alcoa to report a 15% drop in profit of $0.69 per share and a 9% drop in revenue of $7.34 billion. The stock has a slight tendency toward wider next-day moves on the heels of evening financials, doing so in nine of the past 17 quarters. In the near-term, the performance shifted slightly, with three narrowing or reversing moves in three of the last four quarters. On April 7, 2008, the stock gained 0.4% after the company missed the Street’s estimates by a penny-a-share but beat revenue estimates. The gain reversed the following day with shares ending lower by 0.7%.

On Friday, General Electric Co. (GE | Quote | Chart | News | PowerRating) is second Dow Jones Industrial member to release earnings when it reports its second-quarter before the opening bell. Often regarded as a bellwether, GE is expected to report a 1.9% increase in profit of $0.54 per share and a 7.1% rise in revenue of $45.3 billion, according to analysts polled by Thomson Financial. How can you play this trade? GE is recently favoring a mixed trend between sessions, narrowing twice and widening twice in the past four quarters. Longer term, it has narrowed seven times, widened six times and stayed flat once in the past three years. On April 11, 2008, the stock tumbled 11.6% in the pre-market after GE’s earnings and revenue missed analyst estimates and it trimmed its second-quarter and full-year earnings per share. The stock widened its losses, closing down 12.8% in regular trading.

Cassie Guglielmo is a Senior Editor at www.MidnightTrader.com.