Earnings data still painting a cloudy picture

by Wayne Ferbert on July 19th, 2012

The rally in this market this week right before options expiration is great. The majority of the calls we sold last month (and hopefully that you sold following our strategy) are set to expire out of the money tomorrow – but be much closer to the strike you sold than they were last month.

That is what we like to see – a steady move up that permits us to sell calls and see them expire just out-of-the-money.

But will this rally persist? The TV analysts are saying the rally this week is driven by positive earnings. Certainly the technology sector has announced solid earnings this week and that has helped drive stocks some.

According to Bloomberg, of the 99 companies in the S&P500 that have reported already, 70% have beaten analyst expectations for earnings. If you remember, last quarter at about this same point in earnings season, 69% of S&P 500 companies had beaten estimates. But that quarter did not see any kind of lift from earnings.

I think you should expect the same non-event this quarter. While earnings might be coming in solid, forward expectations continue to be muted. Mostly, the C-office doesn’t seem to have a lot of forward visibility. The CEOs with the worst forward visibility: the CEOs running firms with European business exposure. None of these CEOs are going out on a limb on forward earnings power. That is a lot of firms!

Expect the market to continue to be range bound. So, we continue to like selling calls on positions – especially after rallies. In addition, any individual stock stories in a smart pair trade would work well now – especially if you use options and create a positive theta trade out of it. Get paid even if both stocks tend to just move sideways!

Happy hunting!

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