Expect Oversold Stocks to Rally This Week
Jul 7th, 2008 | By Rick Pendergraft | Category: Featured, Financial NewsEarnings season is upon us. Aluminum giant Alcoa (NYSE:AA) reports 2Q results tomorrow. General Electric Co (NYSE:GE) follows suit on Friday.
Stock futures rose this morning ahead results from these bellwethers, mainly buoyed by lower crude oil prices and a stronger dollar. CNN reports that at 8:50 a.m. ET, the Nasdaq and S&P futures were higher, suggesting a stronger open for Wall Street.
But how will stock prices play out on earnings news? Rick Pendergraft in Investor’s Daily Edge says oversold US stocks will rally this week. But expect the selling to resume soon…
Here is how I see things playing out over the next six weeks or so. Due to the extreme number of stocks that are oversold right now, I can see the indexes rallying this week and perhaps even early next week. This would be enough to get most of the stocks out of oversold territory.
The problem is the long-term trend is still to the downside. The bearish crossover of the 10-month and 20-month moving averages on the S&P that I pointed out in last week’s article is just getting started.
I look for a mild rally over the next week or so, and then when the earnings start rolling and falling short of expectations, the selling will resume. Not all companies will get hit, as some will beat expectations and some will rally because the expectations are so low that they can’t help but go up. Overall, I look for earnings to disappoint as a whole and the low from March on the S&P will be taken out over the summer.
Historically, over 60 percent of companies beat their earnings expectations. In Q1, only 48 percent beat expectations. I would expect more of the same this quarter.
As we all know, earnings season is all about expectations, and right now, it seems that the expectations are for the financials to do poorly, but all other sectors will grow at a double-digit pace. I just can’t see that happening with the employment picture looking like it does and the housing market being the worst that it has been in 25 or 30 years. Add to that the abysmal consumer confidence numbers, and I just don’t see companies growing their earnings by ten percent or more.
Source: Are You Scared Yet? You Should Be, Earnings Season Starts This Week
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Rick is currently the Editor-in-Chief of The ETF Options Trader and the Triple Wave Investor. At the age of 23, on the third options trade he had ever placed, Rick turned $1,800 into $22,000 in less than a week, when the company he bought became the target of a takeover. He admits it was a stroke of luck, but it was a memorable education as to the leverage that options can provide. He lives near Delray Beach, FL with his wife and three children.
