Earnings season is here again as companies prepare to announce their third quarter results. While most on Wall Street aren’t excited at the prospect of negative year-over-year earnings growth, excessive pessimism could set the table for surprises. However, though that may have been the case in previous quarters, the growing headwinds could prove even stronger for companies to overcome this time around.
We asked Toni Turner of TrendStar Trading Group in this week’s interview on her expectations as companies begin to report this week.
EQ: Earnings season for the third quarter is set to begin as Alcoa (AA) and a few other names such as YUM Brands (YUM) is set to announce. Are there any major themes or trends that you’re anticipating as we head into reporting?
Turner: The theme is how strong the market can stay considering where it currently trades. Earnings growth in the third quarter is likely to turn negative for the first time in three years, and we know that. So far 91 companies have lowered earnings per share guidance for the season. At the same time, the S&P 500 is trading near the 2000 and 2007 highs. With everybody expecting a nasty earnings season, you have to wonder if we can really expect over the next three to four weeks for the S&P 500 to trend higher here. Is it more likely to either chop sideways because some of the disappointment is already factored in, or slide lower from here, as it is today? So I’m not expecting a trend here so much as I am expecting choppiness which may turn into volatility. We have headwinds in Europe with Spain and Greece, which is a factor in today’s downturn. Conversely, we have QE3, which will support stocks and housing. So I don’t know if we get much more here than just an uncomfortable good news, bad news ride.
Turner: On an overall basis, I’m watching the market leaders and connecting them to their sectors so I can get a better overall feel as to what each sector is doing. Of course the more names that come under each sector, the more confirmation we will see. I’ll be watching Alcoa, which represents Basic Materials—and to an extent Industrials—and that particular sector is going to be impacted by the China slowdown; we just have to see to what degree. Costco is of course a very successful retailer, and its earnings results will tell us about global retailers. On Thursday, Safeway (SWY) in Consumer Staples is coming out with earnings and I’m anxious to see what they report because they’ve been consolidating lately, and food purveyors have had a rough time.
JP Morgan (JPM) and Wells Fargo are very important on Friday when they come out. They’re icons of the Financial sector and we want to see what they’ve done in this third quarter, especially with the upward momentum in the housing industry.
EQ: California gas prices have spiked to record highs recently due to a power failure at an Exxon Mobil (XOM) refinery, coupled with a fire at a Chevron (CVX) plant. Did this supply shock have any impact on the market?
Turner: Sure, we’ve seen a 4-point swing in the last four days on the West Texas Intermediator crude futures for November. It comes between $87.70 and $91.85. California’s gasoline prices have been absolutely jaw dropping, and I live in southern California, so I am experiencing it. They say that prices will fall by 50 cents per gallon here soon. We who live here hope that is true. U.S. refiners lower fuel production every year around this time for maintenance, but the unplanned outages cut the number of refineries that turn oil into gasoline, diesel, and other fuel. So it’s definitely caused wide price swings in the oil futures market. Today, oil is breaking above 92 on news of a pending announcement from Netanyahu, and relations are straining more between Syria and Turkey. We’ll have to see if this trend break can maintain its momentum to the upside. I would advise caution here, as we could see more wide price swings in the near-term.
EQ: Any additional sectors or groups that you’re watching closely this week?
Turner: Well, you know me. I’ve been watching Utilities Select Sector SPDR (XLU), and it’s been rising on the anxiety that investors feel about third quarter earnings. It bounced off its 200-day moving average and it’s had strong volume coming in since mid-September. I’d much rather sit through earnings season in than in a more volatile sector such as Technology. So I am watching the XLU and I’m watching the other sector as earnings announcements come out like the Financial Select Sector SPDR (XLF) and the Technology Select Sector SPDR (XLK).