The Early Morning Rallies in the Market Yesterday and on last Friday, which were Followed by Significant Reversals are a Bad Sign.  

For the past two days (Friday 10-23-09 and Monday 10-23-09) the index for Dow Jones Industrial 30 composite opened up significantly higher only to trade down by over 100 points from the previous day’s close.  This market action indicates that unsuspecting buyers are being lured by the reports of companies exceeding their earnings estimates.  This phenomenon is what I call a bear trap.

The shares of many companies performed well in July and August after they had issued earnings reports which exceeded their low second quarter standards.  Many investors and traders have become accustomed to an environment in which companies exceeding their earnings expectations have become the new norm for increasing share prices.

What investors and traders have failed to realize is that many companies are still generating revenue results, which are well below their previous year’s comparisons.   Only recently I pointed out that there were only four members of the 28 non-bank members of the Dow 30 Industrials composite who were able to increase their revenue over the latest 12 months.

I believe that there was a psychological shift in the market last Friday morning.  I came into my office on Friday October 23^rd and flipped on CNBC.  After watching for a few minutes of hype that was being discussed on the tube any unsuspecting novice investor would have thought the there would be a massive rally in the market that day (Friday, October 23, 2009).  After all, Microsoft had announced its revenue and earnings, which were higher than estimated.  Microsoft also stated that if its deferred revenue were added back its total revenue for the quarter would have been almost $2 billion higher for the quarter.  The headline on story by Reuters was “Microsoft Profit, Sales Smash Expectations”.  Appliance manufacturer Whirlpool had also beat its estimates and its pre market bid was already up by almost $3 per share from its previous day’s closing price.  

With the tone of the news so upbeat I decided to do a quick and dirty on both Microsoft and Whirlpool.  After examining the data I quickly discovered that the earnings reports for both of the big consumer icons were under whelming and certainly did not live up to the news media’s hyped headlines.  Microsoft’s revenue came at 15% below its same year ago quarter.  Even after adding back its deferred revenue it still came in below its year ago quarter.  Whirlpool’s revenue was also down 8% versus its same year ago quarter.

The action of the market on Friday and its performance yesterday tells me that investors are no longer infatuated with earnings beats.  The reality is now setting in that it may take a long time for many companies to get their revenue and profits back to the all time highs.  The Bear Market lives on.  For more information on the bear market and why it will likely last until at least 2015 go to www.bearmarkettracker.com.

Note:   The name BearMarketNavigator.com has been changed to BearMarketTracker.com.