So Good, You Should Be Nervous

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- We're all feeling pretty good, and why not? There's plenty to be happy about. The markets are up more than 10%. Economic data in the U.S. is improving almost as rapidly as the European debt crisis is fading. The turmoil in the Middle East, though roiling, never seems to attain the status of an actual crisis.

Unfortunately, markets are largely inert: They don't look backward. They barely react to what is happening in the present. Any semblance of actualization they have is reserved for the future, for trying to interpret what is going to happen. And the future right now holds a hint of trouble that could deliver a repeat of 2011's summer sell-off and market volatility.

It's always something. This time however, it's earnings. Specifically, earnings progressively weakened -- ever so slightly -- over the last three quarters. Fourth-quarter-2011 earnings (announced during January and February of this year) were their weakest since the market crisis of 2008. Among the venerable S&P 500, only 62% of companies beat earnings-per-share estimates, and only 57% beat revenue estimates. For context, bear in mind that's roughly 10% less than the the same quarter a year ago, a figure that most analysts, economists and statisticians would call material. Worse than historical performance however is that future earnings estimates for 2012 -- exactly the kind of stuff the market reacts to -- are declining with the consensus (based on Bloomberg data) at about 10.4% growth in 2012, vs. 11.7% growth for 2011.

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I'm not yelling "SELL" in a crowded theatre here. I am however telling investors to be on guard, and I'm going to arm them with a tool to pick up the scent of trouble before it's too late.

Specifically, I am advising investors look carefully at the so-called "pre-announcement" activity at the end of March and the beginning of April. Here's why: typically, companies begin to "pre-announce" (often poor) earnings at the close of a quarter to get bad news out of the way during market rallies. In late December and early January, of the companies that pre-announced earnings; 52% warned investors of disappointments.

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