Don't Be Distracted by Today's Short-Term Gains

The broad markets are soaring once again. The Dow Jones Industrials (INDEX: ^DJI  ) up 0.66% at midday, with the markets reacting to better-than-expected earnings surprises as well as more central bank speculation. Although both situations help boost market sentiment, investors shouldn't necessarily factoring this information into their buying decisions.

Eric Rosengren, president of the Boston branch of the Federal Reserve, is encouraging the Fed to enter into an aggressive bond-buying program until the economy gains momentum and unemployment starts to drop. The problem here is nobody knows the true depth of the unemployment quagmire. Good news can encourage previously dissuaded unemployed people into re-entering the job market. In 2012, the number of people unemployed increased twice after the Bureau of Labor Statistics released positive monthly jobs creation numbers.

Also contributing to the increased confidence is the overwhelming number of companies reporting earnings that beat analyst estimates. With greater than 80% of the S&P 500 (INDEX: ^GSPC  ) having released earnings, 65% of the 400+ companies reported better-than-expected numbers, according to S&P Capital IQ. The problem is that these earnings-based pops only offer short-term gains. In the first quarter of 2012, 74% of the S&P 500 beat analyst estimates, and of those 370 companies, the average two-day median return was 0%. This means shareholders are either cashing out of their positions after the earnings surprise, or -- the more likely scenario -- markets are discounting the significance of earnings surprises as they become more ubiquitous. Why are these earnings beats becoming more common? It's possible management teams find it beneficial to understate future outlooks, playing the hero's role when the company outperforms, rather than offering optimistic outlooks and hurting the company's share price when results don't live up to expectations. With this in mind, let's take a look at today's market. 

Tuesday recap

Index

Gain/Loss

Gain/Loss %

Dow Jones Industrial Average 87.11 0.66%
S&P 500 12.01 0.86%
Nasdaq 32.73 1.09%
WTI Crude 1.08 1.15%

Source: Yahoo! Finance

Disney (NYSE: DIS  ) will release its quarterly earnings once the market closes today. Analysts are expecting to see earnings per share of $0.93 on revenue of $11.3 billion. However, investors should not be too anxious about quarterly earnings, but rather should focus their attention on the underlying business and its long-term potential. Another company that is climbing after releasing earnings last night is Chesapeake Energy (NYSE: CHK  ) . The energy company is up 10.62% so far today after announcing record profits of $972 million (EPS of $1.29). However, the 91% increase from last year's quarter can be attributed to large one-time asset sales, not its underlying business. The share price is moving based on management's statements of reining in capital expenditures in the near term to focus on lowering its astronomic debt level through further asset sales.

Another company that has seen volatility over the past quarter, Sirius XM Radio (Nasdaq: SIRI  ) , reported higher-than-expected revenue after its revenue per subscriber increased as well notching a 38% increase in new subscribers. The satellite radio operator also increased its outlook for the rest of 2012 and raised its adjusted EBITDA to $900 million from $875 million.

Bottom line
According to S&P Capital IQ, six of the 10 sectors are expected to have seen growth decrease over the last quarter, meaning it's as important as ever to find solid companies that will help achieve your goal of a secure retirement. The goal is to find companies that will benefit your portfolio for the long term, not stocks that can be manipulated for near-term gains. For this reason, our analysts have written a free report for you: "3 Stocks That Will Help You Retire Rich." This report is absolutely free, but you need to get it now; it won't be available much longer.

Joel South owns shares of no company listed above. The Motley Fool owns shares of Chesapeake Energy and Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 07, 2012, at 1:03 PM, bottomfisherman wrote:

    Wow no one was expecting this out of the MF do a hit piece on SIRI when they post excellent results go figure huh.

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