'Tis the Season

The Chartist examines some of the recent patterns of earnings season.
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Earnings season. It comes around four times a year. First the analysts do their homework and forecast a number. As we get closer to the end of the quarter, they do some checking around and tweak the number again. Eventually we end up with a "published" number, which these days seems to be old before its time, since the whole world now cares about the "whisper" number. I saw a clip on

CNBC

(or was it

CNN

?) the other day on whisper numbers. Seems there's even a Web site which publishes 'em nowadays!

It's not that I object to whisper numbers or published numbers. It's just that lately the pattern of earnings season seems to have changed. The preannouncement season used to arrive in the last couple of weeks of the quarter and last into the first week or so of the new quarter. Investors got nervous during this period. So the market would sell off into earnings season, providing investors with an opportunity to buy good stocks which had been depressed due to the preannouncement season. By the time the real earnings reports got under way, all the bad news was in the stocks, which paved the way for a rally.

However, in the past several quarters, we have managed to make a low just before the end of the quarter, running up into earnings reports. This is what's changed: Now all the good news is already in the stocks. This paves the way for profit-taking to occur into the news.

Just have a look at the past two quarters. The market makes a low in mid-December and rallies right through the first week of the year. As soon as earnings announcements arrive, stocks go down. First-quarter reporting was not much different. A low in late March and a high in mid-April.

Here in the second-quarter reporting period, we've made a low in late June and rallied quite a bit right into the heart of earnings season.

General Electric

(GE) - Get Report

is a perfect example of too much anticipation. The stock ran from 103 to 118, a marginal new high, when its report came across the tape. The report was just fine, no bad news. What did the stock do? It went down. Oh, not a like a ton of bricks, but it did not rally into the news.

And what about

Yahoo!

(YHOO)

? It beat its whisper number and has still dropped 15% since the report came across the tape.

It is also interesting that just as the earnings season kicks off, with the major averages reaching new highs, the overbought/oversold oscillator says we're overbought. It is difficult to imagine any sort of sustained rally from this point. It is more likely, since stocks have already rallied so far so fast, we will see them back off into their good news.

I have searched through hundreds of charts in an effort to find some stocks which might rally into an earnings announcement. I was hard pressed to find any. Some

Dow

stocks which still have good charts include

AT&T

(T) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Sears

(S) - Get Report

.

Procter & Gamble

(PG) - Get Report

doesn't have a good chart (too much resistance overhead), but I have noticed that when Procter trades in high volume at a low and refuses to break, it typically has a rally. Procter could spurt ahead to its resistance near 95.

On the other side of the ledger, I was able to come up with a list of stocks which have gotten ahead of themselves and may just have all that good news priced into them. These are stocks I would not chase on the upside and would certainly take a profit in if I owned 'em. The list includes many of the drug stocks, such as

Schering-Plough

(SGP)

and

American Home Products

(AHP)

. The banks seem stalled despite the rally in bonds.

Chase

(CMB)

is struggling below its spring highs, as are

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

. The retailers reached their old highs and could go no further. While they do not report for several more weeks, I would caution that

The Limited

(LTD)

has acted rather poorly of late and seems ripe for a whack.

It's a mixed bag in tech land, and the name that keeps popping up as a stock to take a profit in is

Oracle

(ORCL) - Get Report

. It's done so well since it surprised the Street with its earnings report, but it's very overextended and appears to be almost gasping for air up here. A move back to the 34 area looks doable.

The biggest difference between this quarter's pattern and the previous two quarters' is sentiment. The euphoria and enthusiasm for stocks at the January and April highs have not carried forward here. The Internet mania we saw at those previous peaks is absent here. It's more likely the current market environment is one we're likely to muddle through for some time. Corrections will find buyers down below, and rallies will find sellers up above.

Author's Note: For readers in Asia, I will be the guest host on

CNBC Asia's

"Squawk Box" on Wednesday, July 14. This show does not air in the U.S.

New Highs and New Lows

Cumulative Advance/Decline Line

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she was long AT&T, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.