It’s a jungle out there in the world of investor and analyst expectations. Amazon (AMZN) handily beat analyst’s expectations in their earning announcement this week. Now, in the bull market of 1999 and early 2000, Amazon’s stock would have seen a immediate upside pop despite the fact that earnings were still strongly negative, just not as negative “as expected”. In a bear market environment, investors don’t seem to care much about meeting or beating expectations if earnings are negative (as in 17 consecutive negative quarters). Amazon lost 24% on the day of their big announcement. The point of this sad tale is to identify the fact that earnings expectations have been lowered to the point that even the weak and weary can meet or beat them. Pessimism among analysts and investors alike is spreading like wildfire. A sure sign that the end is near.

The markets deteriorated a bit further this week but are still hanging in there. This is the make or break point for a turnaround if one is to materialize. Much more selling will all but lock in the reality that all indexes are headed for a retest of the April lows. A good week of strength could break the downtrend that began mid May. Yesterday’s inner-day turnaround was encouraging but not convincing. The trend is still down and our own expectation for a July rally failed to come true. August is not traditionally a strong month and then we’re right back into earnings warning season again in mid September. Again, technically, the market is in the process of building a based or a foundation from which we can build a new bull market. These things take time and patience is key. You may feel frustrated, tired and find yourself looking for alternatives to the stock market at this point. This is very natural at this stage of the game. Those who are willing to wait will be rewarded. Those who can’t stand to wait will pull out in the same month as the bull market is born. It happens over and over again. Every bear market cycle has the same emotional impact on investors. “Stay the course” as our friend G. Bush used to say.

A couple things to watch in the coming months are the direction of interest rates, the US dollar and commodity prices. All three variables dictate inflationary conditions in the market. Currently, interest rates appear to have bottomed regardless of what the fed might do in the next 3-6 months in the way of rate cuts (inflationary). At the same time the US Dollar is showing signs of weakness (also inflationary). Commodity prices however are uncharacteristically falling sharply. While I am not currently concerned with the prospects for inflation, we should be on watch. If commodity prices begin to head higher, we could see quick and furious bout of inflation, which would really throw a wrench in the market’s gears.

Along that line, I would also seriously consider the risks of getting too far out on the real estate limb. If mortgage rates begin to rise again (and I think they will soon), I believe the residential real estate market will stop dead in it’s tracks. Affordability based on favorable mortgage rates has kept the real estate market suspiciously strong in the last 12 months. Rising interest rates, nationwide layoffs, a bear market and a sharply contracting economy do not equal strong housing prices. Please call me if you would like to discuss this further. Sorry for the somewhat negative update but I call it like I see it.
Have a great week