Measuring the Market's Great Expectations

"A great obstacle to happiness is to expect too much happiness."

-- Fontenelle

Earnings season starts in earnest this week. Intel reports tonight and will be extremely important in setting the overall tone. If it doesn't excite the market the likelihood is that some caution may inch into what has been a very optimistic and buoyant atmosphere. AAPL reports on Wednesday night and it will also have a major effect on the market mood. We also hear from the likes of LRCX, MER, MOT and GE this week.

Earnings season is primarily a story of expectations. The actual numbers are only important in how they measure up with market expectations. If the market is expecting very good news we'll have some trouble moving up unless we get exceptional news.

Measuring expectations is not an easy game, and analyst estimates are only one measure of expectations. Because of the propensity of many companies to "manage earnings," the market is often looking for numbers that are higher than the published estimates. Every earnings season we see situations where the numbers that are reported are better than estimates but the stock sells off anyway, and I'm sure we'll see some cases of that again.

One thing we have to be particularly attuned to is how things have traded prior to a report. If the stock or the market has moved up sharply, it would indicate that many are looking for good news and trying to get in front of it. The more that occurs the higher the expectations will be, and the greater the chances of a sell-the-news reaction once the news hits.

Last week the indices were struggling until news of the Apple iPhone hit. That really got things running and by the end of the week we had a technical breakout and an extended market. That puts some pressure on Intel and Apple this week to do better than expected and the market is likely to be a bit skittish about that.

Regardless of what the overall market may do during earnings season, we will have some very good trading opportunities in individual stocks. There are always a few new emerging leaders that produce exceptional reports as well as some with promise that disappoint.

We have a little beginning-of-the-week optimism this morning with a positive open indicated. Overseas markets are mostly down after a good day yesterday while we were closed and oil is seeing some pressure yet again.

At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.

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James "Rev Shark" DePorre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children.Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here to send him an email.