Will The Earnings Season Lead to Prosperity or Panic?

26 Jul

Looking to the major market indices it isn’t clear what market action to expect over the remainder of the year but could this be another year of two halves? The pattern of the market does look like it’s forming a bearish rising wedge.

Remember, technical analysis is always part art and part science – so you can never be completely certain on outcome based on a market pattern. Using historical analysis – a rising wedge pattern – roughly two-thirds of the time they will break to the downside. (Conversely, one-third of the time they break to the upside.)

Market Timing Indicator for July 23 2012

In accomplishing our goal of capital growth we must do a number of things. We must make returns on our investments, we must protect our investments, and we must limit our losses.  While all three aspects work in tandem with each other, we must bias our allocation towards one specific goal.

Regarding the current portfolio positioning, I’m not so focused on the chance that these wedges will break to the downside – more the impact of each scenario on my client’s portfolios.  Markets are currently heading towards long-term resistance lines that have been around for decades.  If we do break to the downside, although at some point I think we will, there could be a very significant sell off with consequences that no one can predict at this point.  Alternatively, there is the potential to an upside break and if there was I expect it will be quite muted.

The only scenario I believe has a true chance to inflate equity values is a series of positive earnings announcements.  A lot of expectations, earnings numbers, guidance, etc… have been revised downwards over the last couple of quarters, so there is the opportunity for some positive surprises that could lead to some bullish price action.  In absence of such a scenario, I really can’t think of much else that would prompt a run up.

Further, I expect trading in the near future to get very volatile. When reviewing the shape and trend of the last quarter the typical following quarters would show high volatility with little overall change then a correction followed by a recovery phase from over-panic. The question is will this trend repeat this time? 

Screen Shot 2012-07-24 at 20.15.52

Historically, and looking forward as August and September have been very costly for the average investor. 

My focus will be in taking the highest probability client appropriate risk-rated strategy that offer hopefully the best risk to reward scenarios.  There will be times when we miss our opportunities, and times when they’re not timed perfectly.  But, patience pays off in the long run…there goes my crystal ball – still doesn’t work…

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