It appears that U.S. equities are intent on rallying. Bottom callers are out in full force. As mentioned in the last post, I thought that Friday could be a big up day if Citigroup, Honeywell, and Caterpillar had good earnings. All three companies seemed to please investors judging by their performance. Last week for equities was actually better than any week in all of 2007. Recall that I thought the initial impetus for a resumed downtrend would be earnings significantly worse than what was expected. Lo and behold we have this article in Friday's WSJ.
"Thus far, roughly 20% of the companies in the S&P 500 have reported, and overall first-quarter earnings are down 22.1%, according to Brown Brothers Harriman. But excluding financials, earnings are up by 8.2%. If the actual reported earnings are combined with estimates for the remaining companies, earnings are coming in slightly above expectations, at a 12.9% decline. Excluding financials, they're up a healthy 9.5% Brown Brothers says."
Reading that and many other bullish pieces in the news (especially on Friday), it appears the market really wants to rally. For the companies that have reported thus far (granted only 20%), actual results have been almost twice as bad as expectations. But the indices are climbing. We're in this mode of "Well if only we don't look at these numbers, it seems we're in pretty good shape!" And we still have what I believe to be wildly optimistic 2H 08 earnings. Consider again:
"Despite the first-half losses, some analysts predict a big rebound in third- and fourth-quarter earnings. The wave, they believe, will be led by financials and companies that make and sell so-called consumer cyclicals -- such as cars or home furnishings. Such an uptick is expected to lead to an 18% rebound in third-quarter earnings and a full-year gain for S&P 500 earnings of 14.7%, according to Thomson Reuters."
And remember this rally took place under the backdrop of very bad housing data, $116 oil, better than expected industrial production, and elevated inflation numbers. It's safe to say that the economic data was more negative than positive.
Now I don't want to fall into the trap of only only looking at economic indicators and not listening to what the market is telling me. But I do feel that I'm coming to the logical, objective choice here by having a negative longer-term bias towards U.S. equities. My solution to this will be shorter term trading on margin trying to take advantage of the current rally.
