A Market and Earnings Reality Check

Wow. Great open, then a dip into the red ink, and then a bounce back into the black - and all in less than two hours worth of trading. And here's the killer..... I don't think we're past all the insanity yet!

I know that's the last thing you wanted to hear, but it's just the way it is.

To the NASDAQ 100's (NDX) credit, it is back above the 25x5 DMA today, and on its third day above the 3x3 DMA. On the other hand, there's a giant gap left behind from Wednesday's pop, and the market's been moving higher on nothing but momentum since then; how much gas is really left in the tank?

Fact is, the market needs to survive a real test first before we can take this bullishness at face value. And, I just don't see that happening yet. This is a dead-cat bounce, and not a rally born from newfound optimism on stocks. Volume on the way up's been way low.

Anyway, with not much likely to change between now and the end of the day/week, I figured we'd take a little time to do something for you we don't get to do often enough... take a step back and look at the bigger picture, and earnings in particular.

First and foremost, the S&P 500 has easily topped its earnings estimates that were out there before earnings season started. In late March, the pros were thinking the S&P 500 - if it were a company - would earn about $23.86 per share for Q1. Now with a little more than half the S&P 500's companies having reported, the index is on pace to earn $25.38 for Q1, which is 6.3% higher than expectations.

Freakin' ridiculous, though we've all seen it before. The media screams 'gloom and doom', scaring investors out of stocks, and then we see that things aren't nearly as bad as they were supposed to be.  Whatever.

Just keep in mind for next time around how it's very rare for the market to not have a good earnings season, even if only because the entire industry sets the bar so low before earnings season kicks off. That's part of the reason stocks struggled in early April - lowered guidance. Turns out things aren't that bad after all, and stocks have been feeling a little bullish pressure as a result. It's just part of the dance, you know?

But what about today's market weakness? What about Ford's (NYSE:F) huge shortfall? What about Spain? Oh yeah, I see all of that. It's like the newsletter was talking about on Wednesday though - you can either trade, or you can invest. If you're a long-termer, than the whole earnings picture matters, and the day-to-day stuff doesn't. If you're a short-term trader, than the whole earnings picture doesn't matter, and the day-to-day stuff is the key. You really can't blend the two, however. The problem is, the media likes to convince you to be a trader using the bigger earnings picture data. It rarely works out. [Reality check: Sorry, but Spain's debt woes and Ford's pitiful results last quarter aren't signs of sweeping trouble for everybody else.]

Now, I said all of that so I could show you the nearby graphic. It's a look at the S&P 500, the trailing and projected earnings by quarter, and the subsequent P/E ratio.

If you're strictly a short-term trader, you don't care. If there's any part of you that's a true investor though, then you'll want to take a look.

Are you still with me? Good, because the bottom line is, it's good news. Not only is the market on track to post record earnings for last quarter (something nobody expected), but the smart folks at Standard & Poor's say the march into record-earnings territory is going to continue through 2013.

At the same time, the market is still at rock-bottom, historically low valuations. The S&P 500's trailing P/E is only 14.12, which is at the extreme low end of its 20-year range.

I know a lot of people say that the P/E ratio doesn't matter, and I don't not understand what they're saying. Thing is, it doesn't matter UNTIL IT DOES. It mattered in 1995 when the P/E reached a low of 14.4, and stocks nearly tripled in value over the next five years. Just sayin...

Either way, the bullish earnings outlook isn't going to amount to a hill of beans in the near-term. We're just going to have to burn through all this volatility before the bigger trend resumes, which - unfortunately - may mean more downside before it's all said and done.