The Impending Earnings Season

AA generally kicks off the earnings season. They report on July 8th. As I have posted several times in the past few weeks, I see Q2 earnings seasonas a possible catalyst for a market selloff. It could start a bit earlier, if we get some negative preannouncements (or nervous investors selling ahaed of actual results). Over the next few weeks we will likely continue to churn here, but be CAREFUL going into the July 4th weekend.

I still believe the earnings will be generally OK, but the EXPECTATIONS have risen dramatically. What was viewed as positive (meeting lowered guidance and severely cut selllside estimates) in Q1, will be a huge dissappointment to impatient investors expecting a real and not just second derivative improvement. Most management teams will provide mildly upbeat outlook, but visibility still remains very cloudy into 2H. Historically, the second part of the summer is when the pain of "Sell in May" adage becomes painfully obvious.

So what if we do get the pullback off of the earnings disappointment?
I still think investors should buy the pulback, as long as the pirmary upternd remains intact. Potentially, some sector rotation could soften the overall market decline, as cash will flow from overbought sectors such as energy, commodities and tech into some of the underperforming secotrs such as Healthcare (still pressured by impending HC reform), utilities and some other defensive consumer staples. You can rotate as well, but I would also watch for opportunities to reenter trades in your favorite Energy, Commodities, Emerging Markets and Tech stocks. Stock picking and not broad based bets on the market will be key to the successful 2H performance. Easy rewards from shorting the market (that worked in Jan - March) or buying the market (that worked in March-May) will likely dissappear.