Forget the Debt Ceiling…It’s Earnings Season, Baby

Earnings season starts out on strong footing

   

Indulge us as we channel legendary college basketball commentator Dick Vitale for a moment: It’s earnings season, baby!

Alcoa (NYSE:AA) kicked off earnings season with a positive and slightly better-than-expected earnings report on Tuesday after the market closed, and that put Wall Street in a bullish mood.

Wait…what? Wall Street is in a bullish mood? The S&P 500 is challenging its 52-week highs? How can this be? Isn’t there a debt-ceiling deadline to be worried about? Shouldn’t we be concerned about government spending being cut when the sequester goes into effect? Isn’t the federal government going to have to shut down if Congress can’t pass a continuing resolution — or heaven forbid, an actual budget? How can Wall Street possibly be in a bullish mood?

The fact is that, while all of those concerns are certainly valid, they are concerns that aren’t going to have any effect on the stock market until we get closer to the deadlines for each concern, respectively. We certainly aren’t going to see traders on Wall Street wringing their hands and selling because of the debt ceiling any time in January.

We’ve seen time and time again that Wall Street is willing to give politicians (whether they are in the United States or Europe) plenty of time to try and resolve their differences, understanding that with today’s polarized political bodies, it often takes the threat of a deadline to get anything done. All we have to do is look back to this same quarter a year ago to see a perfect example of this.

In Q1 of 2012, the world was watching to see if Greece was going to default on its debt. There was talk of bailouts, talk of default and even talk of Greece being kicked out of the eurozone and bringing back the drachma currency. Would there be cascading ripple effects that would paralyze the global financial system? Would a Greek default trigger a Portuguese default, a Spanish default or even an Italian default? Henny Penny was having a field day in the press. So what did traders on Wall Street do during this time? They pushed stocks higher, of course.

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You can see in the chart how the S&P 500 — despite dealing with a strong resistance level — was able to surge higher, even though the financial media were obsessed with the Greek default story.

But why did this happen? Simple…that earnings season was a good one. Companies were reporting better-than-expected results for Q4 2011, and Wall Street was rewarding them for doing so.

The question is; Will that same thing happen again? Will the earnings results for Q4 2012 be better-than-expected? So far, it’s looking like this earnings season could shape up to be slightly more positive than a lot of analysts expect, and that would be a good thing for stocks. Of course, we just got started with this earnings season, and a lot could change in no time at all — but so far, so good.

John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


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