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Weekly Market Commentary 06-27-2011

Weekly Market Commentary 06-27-2011

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Published by Jeremy A. Miller

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Published by: Jeremy A. Miller on Jun 30, 2011
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06/30/2011

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Member FINRA/SIPCPage 1 o 2
Jeffrey Kleintop, CFA
Chie Market StrategistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Market Commentary
June 27, 2011
Pre-Announcement Season
Highlights
The so-called earnings “pre
-
announcementseason” is upon us.The current ratio o negative-to-positive pre-announcements is 2.3, above the historicalaverage pre-announcement ratio o 2.1;historically this 2.3 ratio has been ollowedby a gain o about 2% in the S&P 500 duringthe ensuing earnings season.While the above average pre
-
announcementratio may be a small positive or theearnings season once it gets underway, thenext ew weeks may continue to eaturenegative pre
-
announcements and modestlosses or the stock market.
The so-called earnings “pre-announcement season” is upon us. This isthe time when corporate leaders oten pre-announce any changes to theirearnings expectations ahead o their second quarter earnings reports thatbegin in mid-July. These pre-announcements will likely be with us or thenext ew weeks until the actual earnings reporting season begins.Traditionally, the start o the earnings season is marked by Alcoa reportingtheir quarterly earnings. This earnings reporting season, Alcoa is scheduledto announce their second quarter results on July 11. During the ourweeks that begin at the start o the earnings season, the bulk o S&P 500companies report their earnings and the stock market reacts accordingly.While this is still about three weeks away, we can get a reasonably goodindicator o how stocks may perorm during the earnings season by lookingat pre-announcements.As we highlighted in last week’s
Weekly Market Commentary 
, we expectmore than the average number o negative pre-announcements thisquarter. For the past couple o years, the pre-announcement season hasbeen relatively quiet as business conditions improved. However, due to theeconomic slowdown during the second quarter and supply chain problemsextending rom the disaster in Japan, the next ew weeks may eaturemore bad news than in recent quarters as companies lower their earningsoutlook. Last week, we heard rom a wide range o companies lowering theirexpectations or the quarter. S&P 500 companies lowering their earningsguidance included: Carnival Corp, Conagra Goods, Whirlpool, and Jabil Circuit.So ar, the ratio o negative-to-positive pre-announcements is 2.3, abovethe historical average pre-announcement ratio o 2.1. An above-averageratio has oten lowered the bar on expectations heading into the earningsseason as market participants price in a greater probability o company’smissing analysts’ estimates. Over the past 10 years, an above average ratioo 2.3 has been ollowed by a gain o about 2% in the S&P 500 during theearnings season.While the above average pre-announcement ratio may be a small positiveor the earnings season once it gets underway, the next ew weeks maycontinue to eature negative pre-announcements and modest losses or thestock market. Although the track record indicates a modest gain or stocksduring the earnings season, there is a risk that stocks will buck the trend andcontinue to decline during the earnings season despite the above-averagenegative pre-announcements.
200220082010200620044.23.63.02.41.81.20.6015%10%5%0%-5%-10%-15%S&P 500 Pre-Announcement Ratio
(Left Axis) 
S&P 500 During Earnings Season
(Right Axis) 
1
Pre-Announcements Predict Stock MarketPerormance During Earnings Season
Source: LPL Financial, Bloomberg, Thomson Financial 06/24/11

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