markets

Everybody is hoping for a swell earnings season on the assumption that it will help the markets move higher.

However, if history is any guide, weaker earnings may be just what the doctor ordered.

Here's why.

Obviously we don't want a disastrous set of numbers, but downbeat earnings and guidance actually creates the possibility of more positive surprises that will encourage money to move into the markets instead of away from them.

Think of it this way: When things shift from good to bad there's a distinct aversion to risk and assets flee like they did following the "dot.bomb" blowup in early 2000 and at the onset of the financial crisis in 2007.

But when they go from bad to less-bad, it's human nature to assume things are improving. And that sentiment brings out the bargain hunter in all of us while also drawing money into the markets. That was the case in mid-2002 and just after March 2009, when people were hoping for something - anything really - to get the juices flowing again.

Winning the Expectations Game

Wall Street understands this psychology better than you might imagine. That's why m anipulating earnings and analyst expectations is a science in and of itself.

Everybody denies it happens, but ask nearly any seasoned Wall Streeter and you'll get a sideways glance and a knowing smile.

The wall that supposedly separates the research, investment banking, brokerage and trading functions of any given firm is a plumber's worse nightmare, depending on your perspective.

Former analyst Stephen McClellan notes in his book "Full of Bull" that this is how the game is played.

He says that's why it's important to do what Wall Street does rather than what it says as a means of securing your personal profits.

I couldn't agree more.

Having spent more than 20 years closely involved with the markets, I've learned that Wall Street's blinders, miscues, set-ups and secrets are often more telling than the "telling" itself.

Consider what's happening right now.

According to Standard & Poor's, analysts have raised projections for 366 companies while lowering those associated with another 534 companies. In other words, lowered expectations out number rising expectations by almost 2:1. Bespoke Investment Group notes that all ten S&P sectors have had more negative revisions than positive.

That's in stark contrast to two years ago when analysts were positive at the onset of 2010 for roughly 80% of the market with the exception of healthcare and utilities. Both were viewed as little more than bastard children and cast as negative performers.

As you might expect, many investors bailed out of the latter while rushing into the former. But that turned out to be a mistake -- healthcare and utilities were the best performing sectors in 2011.

This doesn't always happen, but it's well documented that Wall Street often says one thing and does another. You'd think at this stage of the game things would be different, but they're not.