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Cramer: Two Red Flags as Earnings Throttle Higher

Monday, 22 Apr 2013 | 6:42 PM ET
Cramer: Hidden Risk Factors
Monday, 22 Apr 2013 | 6:45 PM ET
Cramer explains how to parse an earnings report and uncover possible risk factors.

(Having trouble with the video? Click here!)

Sometimes headline earnings can look downright attractive, yet dig down and you may uncover some concerning information.

As earnings season kicks into high gear, Jim Cramer wants you to watch for these two potential problems.

Geopolitical Risk

As you parse a quarterly report, "Always look for a company's geopolitical risk," Cramer said. In the past that's largely meant whether turmoil in the Middle East could roil the stock.

Of course those concerns still stand. "That will always be an issue," Cramer said. But in the modern market geopolitical risk has taken on a whole new meaning.

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Today it has everything to do with Europe.

That is, Cramer advocates always looking at how heavily a company relies on Europe for business and whether it will be badly jostled by unexpected developments concerning Europe's financial woes.

For example, developments in Cyrpus sent investors running for the sidelines as they grappled to understand the implications.

In this market, "I wouldn't own a bank until I understood just how tethered it is to Europe," said Cramer. Similarly, I wouldn't buy tech until I had a similar understanding. Some tech companies have tremendous exposure to European consumers."

That's the new geopolitical risk and Cramer said that earnings are an excellent way to understand just how serious the risk may or may not be for the stock you're holding.

Image Source | Getty Images

Technicals

In addition, Cramer thinks the market is trading so technically that before a company reports earnings, it's also critical to note the chart patterns.

The so-called technical analysis can suggest the stock's next likely move and protect you from an imminent sell-off if chart patterns are negative.

For example, if a stock is struggling with key levels of resistance, then it becomes more likely that earnings would have to be spectacular for the stock to climb further.

Or if a chart looks like it's making a 'scary' pattern - such as the head and shoulders pattern - earnings that meet expectations probably won't boost shares.

Conversely, if fundamentals appear strong and a stock sells off, chart patterns may help identify a level of support – a price at which buyers enter the market.

"If a stock goes down big after a quarter, the charts may tell you exactly where to get in," Cramer insisted.

Although Cramer is a fundamental investor, as earnings gets underway he thinks technicals can not be ignored. More often than not, chart patterns can either confirm or deny your investment thesis and potentially save you from a world of hurt.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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