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A risky and volatile earnings season forecast

Today's Financial News - Posted January 12, 2009

The first earnings season of 2009 is upon us. There is little doubt this is going to be one of the most important reporting seasons in decades. If things are even a bit worse than expected, look for big trouble.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore—(TFN): We are only two weeks into the New Year, but there is a very good chance this may just be the most important week of a year that is sure to go down in the history books as one of the most tumultuous and unnerving in Wall Street history.

Later today, when Alcoa (NYSE:AA) announces its fourth-quarter results, we will kick of what is bound to be a highly volatile earnings season. The aluminum producer will start the season on a less-than-stellar note. The company is expected to post a loss of a dime per share. Anything worse than that and the next few sessions could be brutal.

Analysts and investors are expecting horrid news. If the majority of companies can match or exceed their expectations, we may get off unscathed. But if just a handful of major companies miss Street expectations or announce unflattering 2009 projections, stand back. The bears will maul Wall Street.

Setting the bear traps

The earnings reports will start with just a trickle today. Alcoa kicks it off, then companies like Intel (NASDDAQ:INTC) and Johnson Controls (NYSE:JCI) will  report later in the week. Next week is when things will get really interesting. Look for excitement on Tuesday when Johnson & Johnson (NYSE:JNJ) and International Business Machines (NYSE:IBM) open their books to investors.

After the action we saw last week and this week’s dismal start, investors looking for a positive week may have the upper hand. After all, with the S&P 500 sitting below 880, it is now just above its 50-day moving average.

We are likely to see resistance at that level, but be cautious. If the key index drops below the mark, we could see a strong plunge.

Looking forward, volatility will reign once again. Just as we saw during the days of the TARP voting in congress and the weeks surrounding the Detroit bailout, Wall Street will be filled with ups and downs. That means the VIX is bound to rise.

Investors looking to take advantage of the action would be smart to buy VIX options. If you are looking for a speculative play, the January 45 calls (VIXAG) are appealing. Or if you want to put a little more time on your side, you can check out the February 45 calls (VIXBG). Either option will lead to profits if the earnings season lives up to its nerve-wracking potential.

We will just get a few earnings “showers” this week. Next Tuesday is when the hurricane winds will be felt. At this point, it is tough to tell which way the winds will blow. The only thing we know is it will be windy. That means volatility will be on the rise.


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Posted by Andrew Snyder · Filed Under Featuring..., Investment Strategies 

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