This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Day Ahead: A Slowly Decaying Market

In trying to find an object to which I could compare the market, I figured there was nothing better than a slowly decaying corpse: That is, it's still presentable on the outside, but it's disappearing on the inside. As the market enters the week, it's obviously still in the land of green on the year, though it's arrived into the fourth quarter with a whimper. Markets peaked Sept. 14, and suddenly the sky was falling. I wrestled with whether I should go bullish again amid the pullback, but the decision came more quickly than I thought. It's quite dicey to load up on risk after a two-week slow bleed-out, given that the next five days are potentially littered with headline and fundamental death traps that aren't priced into valuations.

Specifically, I am concerned about this: As the president and the Vineyard Vines tie-wearing challenger begin the debate circuit, corporate America will take the opportunity to stick it to slow-as-molasses politicians and create a dust storm known as earnings-warning season. Yes, you read that correctly. Across the country, an earnings-warnings season will give the debaters talking points ahead of a jobs report that, barring a fat finger on the "plus sign" button, promises be another subpar, post-recovery junker. It's likely the report will only add to the negatives the bears are carrying around to sell to weak-hand bulls.

Since I am in favor of preparing for everything, here is what you should be seeking during this currently hypothetical earnings-warning season.

Executive Analysis

"The global economy was weaker than we'd expected." This is the classic table setting for the full-year earnings warning. As that sweet nothing rolls from their tongues, this is where my head will be.

  • "Global economy" does not mean only the U.S., Europe and China. It also includes emerging markets such as India and Brazil -- and, in India, April-to-June growth in India came in at 5.5%, the worst performance in a decade. Meanwhile, Brazil's central bank recently reduced its 2012 growth estimate by a full percentage point.
  • How the "global economic weakness" impacts higher-margin business segments will be vital in offsetting softer growth in more established, less profitable businesses.
  • "Inventory destocking" is one phrase that has often sent chills down my spine. It's a phenomenon that signals customer hesitancy is unlikely to abate in a single quarter, and it usually says reordering is not as robust as the market has been pricing into the company's valuation.
  • I'm on a constant hunt for "hype words" designed to deflect attention from the earnings warning and limp operating performance. Examples include: "outstanding," "stellar," "record," "best ever" and "robust."

Actual Earnings Warning

You will want to watch the depth of the full-year earnings shortfall. By depth, I mean two things: (1) how far the slashing was relative to prior expectations; and (2) how far the reduction was vs. consensus. Massive depth would be a negative surprise, and I would lean toward avoiding that stock on the probable pullback, as this indicates unstable fundamentals. But if the depth is somewhat near Street expectations, and there are pockets of the business wherein profits continue to grow faster than sales -- and the stock is reined in -- that is where opportunities will emerge.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,709.34 -121.42 -0.68%
S&P 500 2,061.34 -14.47 -0.70%
NASDAQ 4,769.2630 -36.0280 -0.75%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs