Sectors To Watch: Earnings Or Elections?

| October 8, 2012 | 0 Comments

electionsThe S&P 500 has been stuck in neutral the last few weeks. 

At this point, the large cap index is locked in a tight trading range between 1,430 on the low end and 1,465 on the high end. 

One thing’s for sure, this wasn’t the result many were expecting after Fed Chairman Bernanke announced QE3.

But don’t be fooled by the markets’ lackluster response to QE3 so far.  The amount of money the Fed’s pumping into the market will have an impact on stocks.

You see, the market’s recent performance has more to do with the lack of a bullish catalyst than the impact QE3 will have in the weeks and months ahead.

Put simply, the potential for QE3 was the bullish catalyst that fueled the S&P’s massive 16% rally this summer.  But now that QE3 has been announced, traders are having a hard time finding a reason to put their money back to work.

The question on everyone’s mind is… what will the next catalyst be?  And more importantly, where should I invest to profit from it?

The two most obvious potential catalysts are the upcoming presidential election and the third quarter earnings season.  But figuring out if these will be a bullish or bearish catalyst isn’t all that clear.

First off, whoever ends up being the next POTUS will have a dramatic impact on which sectors will be winners or losers. 

But according to the latest numbers from the Gallup Poll, the race is now a coin flip after Mitt Romney cleaned Obama’s clock at last week’s debate.  The poll shows each candidate now has 47% of the vote.

With the election too close to call, it’s unlikely to be the catalyst traders are looking for.  That leaves us with earnings as the most likely catalyst to fuel the markets next move.

But here’s the thing…

This earnings season is expected to be the worst since 2009.

At the beginning of the third quarter, analysts were forecasting S&P 500 earnings per share to grow 1.9%.  But they’ve slashed those estimates throughout the quarter.  Now they’re expecting earnings to fall 2.7% from the same quarter last year.

But the weakness isn’t expected to hit every sector.  Amazingly, one of the few sectors expected to improve earnings this quarter is… wait for it… financials!

Overall, financials are expected to grow earnings per share by 10% year-over-year.  That’s a big difference compared to the S&P 2.7% slowdown.

That’s right, the most hated sector of the market could soon be the best performing.

If they live up to those lofty expectations, financial stocks have the potential to be the best performing sector the rest of the year. 

Look, I’m not advocating pouring all of your hard earned money into the sector.  But it certainly has the makings of a good options trade.

The Financial Select Sector SPDR Fund (XLF) is a good way to get exposure to the entire sector.  Take a look at buying XLF December 2012 $16 call options.  They only cost $57 per contract.  If financial sector earnings per share soar by 10% or more this quarter, these options could net you some quick profits.

Good Investing,

Corey Williams

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Category: Sectors To Watch

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.