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Random Thoughts: Metric Check Into Earnings Season


Corporate America tries to clear a lower bar.


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Applied Materials (AMAT) and Cummins Inc. (CMI) cut their earnings forecasts yesterday, which put a damper on the mainstream mindset. As per my stated view that Q2 earnings would be less than stellar, the reaction to this reporting season will be more important than the news itself.

To be sure, "slowing global growth" isn't a novel theme. The question becomes one of field position and relative expectations; it's never what 'is' that matters to Wall Street, it's what's 'perceived to be' that moves markets.

As such, let's drill down into our four primary metrics and take a lay of the land.


Over the course of the last month, analysts slashed forecasts on over 700 companies while raising estimates on roughly 280 companies, according to Bespoke Investment Group.

That is on-the-margin bullish as it lowers the bar of expectations, but the onus will shift to forward guidance as the market is a forward discounting mechanism.

I don't put a lot of faith in business conditions on a standalone basis as evidenced by the fact that we've generated a paltry 1.9% GDP despite upwards of $13 trillion in stimulus in one form or another.


Investors are conditioned to expect central banks to toss good money after bad at the overcapacity in debt, leverage, housing, and labor. It will work until it doesn't with all roads leading to debt deflation.

This may sound familiar; it's very much a continuation of themes long discussed in Minyanville. Alas, those conditions are cumulative; there isn't an instance in history when a problem was solved by accelerating the actions that caused the problem in the first place.

As a trader, the destination we arrive at pales in comparison to the path we take to get there. My sense is that it will get worse before it gets better-and those who successfully navigate the coming crosscurrents will be in a spectacular position to prosper when they pass.

Technical Analysis

I'll draw your attention to the channel in the S&P we flagged yesterday. Not only are we currently tickling the bottom of the band, we're also testing the 50-day moving average.

Should be break from here, a pure technical lens points to a retest of the 200-day moving average at S&P 1305-particularly if it's confirmed by a break of BKX 44.

If this level breaks, textbook technical analysis dictates that a backtest would be the optimal time to initiate risk (with a stop set directly above for the most advantageous risk-reward).


Credit of a different breed-that of credibility-is the issue at hand for the markets at large. With a tenuous election creeping closer-and the "fiscal cliff" being used as a political weapon-the mindset of the masses will play an important role in the forward price action.

I wrote an article yesterday, A Bottoms-Up Look at the Global Economy, which touched on some of the dynamics in play. I'm not talking about the stated economic standing; I'm talking about John Q Public and Mr. and Mrs. Mainstream American. This, too, is cumulative, particularly as the stock market is the single biggest barometer of the global psyche.

Random Thoughts:
  • Commodities took a fresh leg lower yesterday and commodity volatility tends to precede equity movement. In short, commodities need to rally or the S&P needs to decline to bring these asset classes back into alignment.
  • My first blush gut sense when I saw the Mario Monti news yesterday (that he wouldn't seek another term) was, "I wonder what he's seeing that the rest of us don't?"
  • After reading Scott Patterson's Dark Pools, I'm not sure I'll look at the financial markets the same way again.
  • It's hard to believe that a $0.16 move in Applied Materials is 2%.
  • If Bob Diamond fibbed to regulators while leading Barclays (BCS), there should be no severance. Full stop.
  • Justin Rohrlich pointed this out as "interesting, through a socioeconomic lens," and I would agree.
  • Patience is perhaps one of the toughest disciplines to master when trading.
  • The Apple (AAPL)-Google (GOOG) pairs trade that we flagged when the stocks were trading at roughly the same price has widened to $35 (our target at the time was $50). Pure heads up for those that may have gotten involved.
  • We rang the closing bell at Nasdaq on Monday to officially kick off the countdown to Festivus 2012, which will be held on December 7, 2012. If you would like to lock your spot, please use "friends12" to secure your 10% early bird discount!
  • As always, I hope this finds you well.

Twitter: @todd_harrison

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