- Created on Monday, 17 October 2011 07:00
- Published on Monday, 17 October 2011 07:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
- Hits: 13648
Earnings season is off to a strong start. It's good enough for now, but trouble is brewing.
It's not how we normally do things, but we'll start with a chart:
That's the VIX -- the so-called fear index. For a week and a half now it has been on a straight path down. It is a record drop during this critical period of the earnings cycle.
It is great news for us short-term bulls.
When the VIX drops, it means traders have a stronger conviction. They are no longer willing to pay a large premium to insure their positions. Just like you and I get a break on our car insurance for not crashing into our neighbors, option sellers charge less for their product when the market looks "safe."
A falling VIX is a sign we can expect much less dramatic swings from the market. Again, it is good news if you are a long-only trader.
What's even better is a statistic our research team handed me... when the market rallies on the first day of earnings season, it continues its climb through the season 64% of the time.
We'll take those odds.
But we aren't gambling. Old numbers don't mean much in a market that is changing by the day. So we'll back our thesis with facts.
One fact strong enough to get Wall Street excited came on Friday -- the strongest retail sales growth in seven months. September's 1.1% climb shows consumers are jumping -- or at least crawling -- into the market just when we need it the most.
Thanks to a couple figures like these, last week was the first in a long time when we noticed the majority of the talk was "anti-recessionary." Most analysts backed out of their bear hides and put on their bull horns.
That means if you're going to make some money in this market, the next six months is the time to do it. The herd is headed in the same direction.
"Everybody is expecting a pretty decent earnings season, if not a great one," Carlo Panaccione told Bloomberg. "They're expecting a rally."
This sudden rush of the bulls plays quite well with a common theme on the Inside. The idea of a "new normal" has us worried. We've entered a land where mediocrity is OK.
Why seek superiority when "good enough" will do? The world's not falling apart... might as well rally.
It's the kind of thinking that sinks ships, destroys businesses... and eradicates nations.
Think of it this way. If GDP growth hits 2% for the second half of this year, every politician in Washington will hail it as a victory. The Left will say its proof manipulation works. The Right will say it's the result of its do-nothing attitude.
Even Wall Street will buy into it, which is why the next six months will treat us well.
But after that, reality sets in. When wages are still stagnant and unemployment continues to flirt with double-digit territory, the sheep will finally realize the herd has moved in a lot of circles but has gone nowhere.
As Anthony Crescenzi of PIMCO tells us, 2% is not good enough.
"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says.
But it all comes down to jobs.
At 3% -- our norm for the past 50 years -- the economy would create 1.6 million jobs each year. But at 2%, it is less than half as many. And 700,000 fresh jobs are not enough to keep up with the increase in the workforce, which means we'd be growing but so would the unemployment rate.
...we'd be spinning our wheels, but slipping down the hill.
Or as our Zach Scheidt put it last week, "Isn't that like taking a step forward on a treadmill -- while the entire platform moves three steps backward?"
For the next four to six months, Wall Street will be in a haze of mediocrity. A slew of "good enough" earnings reports will kick off the party. But come the end of the first quarter, when growth has not budged, panic will set in.
Be a buyer -- make your money while you can. But don't bury those shares under the old oak tree. You'll want to unload them come spring.