I'm not being hyperbolic when I say that this is the most important earning season of your life.
With major banks set to begin announcing in roughly nine days, the market is sitting on pins and needles.
I don't need to remind you about the calamitous context that the financial sector finds itself in.
But while adjustments of expectations are normal pre-earnings, I'm not sure I've ever seen something quite like this.
Typically, you see expectations start to get pulled down as you near announcements.
That's not the case right now. Check out the below graph...
This is the S&P Global's forward estimates for earnings.
That trough at the middle of the chart is the sort of "You are here" on the mall floor map.
As you can see, estimates are projecting this forthcoming earnings announcement to represent the bottom. According to these, it's all uphill from here.
By this time next year, these estimates have us taking out the peaks we saw back in January 2022.
We're talking about coming full circle in terms of expectations. And it only took a span of, what, ten months?
Usually, these sorts of adjustments take as long as two years.
Now, part of the story here is that the market has become more responsive to changes than it used to be back in the early 2000s and prior.
It used to be all phone calls to place trades when I got started. Then we got electronic trades. Now, everybody's looking at headlines on a day-to-day basis and trading them instantaneously.
But that doesn't tell the story here - these expectations are just a little bit much. We're getting ahead of ourselves.
So, what does that mean in terms of the bull- and bear-market cycle? Let's take a look...
We're still in this uncertain phase as to whether or not we've accepted the bull market and moved into despair.
Before things go ahead and turn around for good, we need to reach that true bottom - market capitulation. That's when everybody is just selling out of panic, no matter what the price is.
Getting ahead on the earnings outlook tells me that we're still way, way far away from that point.
That's why I think this earning season is truly going to be of paramount importance. Amazon, Google, Meta - if all of these giants come out and dash these bullish expectations, you're going to see the market react very quickly.
The fact that we've seen the adjusted earnings expectation without this crucial information is asinine to me.
It's like we've dove headfirst into baking in the improvement that's been forecasted without knowing if the heavy cream is spoiled.
I'm not ready to just blindly take a bite out of that cake.
I fully expect us to trade down and test those S&P 500 lows we've seen - which is a roughly 15% drop from its current standing.
You're going to need to brace for a little bit of impact here. Don't leave yourself exposed to the potential of serious shockwaves from these forthcoming earnings.
The market is already making that mistake. You don't have to.
Be sure that you join me each morning for the Long and Short of it this week as we are going to continue tracking the expectations of the market.
And once earnings hits, we are going to be ready and positioned to profit from the market moves.
Enjoy your Easter, I'll see you tomorrow.
The post This market has gotten entirely ahead of itself appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.