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Indicator of the Week: Earnings Season


Take a look at the SPX during earnings season and the latest AAII survey results.

Foreword: Alcoa Inc. (NYSE:AA) reported earnings after the bell last Tuesday, and as one of the first major companies to report each quarter, it marked the unofficial start to earnings season. Wal-Mart Stores, Inc. (NYSE:WMT) typically reports a little over a month after Alcoa, and is one of the last major companies to report. We'll use that as the unofficial end to earnings season. That said, I went back to 2000 to see how the market has performed over the few weeks following Alcoa's report.

General Earnings-Season Returns: The first table below simply summarizes S&P 500 Index (INDEXSP:.INX) earnings-season returns since 2000. It also shows anytime returns for comparison. You can see the SPX hasn't performed all that well during earnings season, averaging a very slight loss of 0.01% vs. an anytime average return of 0.18%. Earnings season has been positive 51% of the time since 2000, compared to 57% anytime. One thing that struck me as interesting: The standard deviation of returns. I would expect earnings season to show a lot of volatility, but the standard deviation of the earnings-season returns was less than the anytime returns.

It's All About Expectations: So how will this earnings season turn out? If you're familiar with our contrarian philosophy here at Schaeffer's, you know that we put a lot of emphasis on sentiment and market expectations. And as contrarians, we believe pessimism among investors will lead to a bullish market.

One sentiment survey we look at is the American Association of Individual Investors (AAII). Each week, the AAII conducts a survey showing the percentage of investors who are bullish, bearish, or neutral. Looking at earnings seasons since 2000, I broke up the returns by whether the percentage of AAII respondents who were bullish was below 40% or above 40%. A summary of the returns are in the table below.

As you can see, when the poll shows pessimism, the SPX averaged a gain of 1.12% and was positive 62% of the time during earnings season. This easily outperformed times where investors were optimistic. If the percentage was above 40%, the index averaged a loss of 0.81%, and was positive only 43% of the time. Now, for the good news: In the most recent AAII sentiment poll, only 30.6% of investors were bullish.

This article by Rocky White was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:

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Micron Technology Speculators Expect Limited Downside

Twitter: @schaeffers
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