I have been prepared for a market correction for a while now, but we have yet to get one. The rally off of the March lows has reached +61% and the momentum continues to be strong. Will it continue even as companies report their third quarter earnings?
Nobody can know for sure, but over the years we have often seen a “buy on the rumor, sell on the news” mentality on Wall Street, especially during earnings season. Stocks ramp up heading into reporting season, only to fall after the news of solid results actually comes out. A similar phenomenon could certainly happen this quarter and as a result I will be carefully watching both what the numbers are, but also how the market reacts to them.
If stocks sell off even after companies post in-line or slightly better than expected earnings, such market action could be the first sign that a long overdue correction in stock prices is on the horizon. In fact, we might already be seeing this. This morning Johnson and Johnson reported earnings seven cents ahead of estimates but the stock is trading down in premarket trading. Will that be the start of a trend, or simply an aberration? We will have to wait and see.