Earnings this week could make for cautious trading
A massive earnings week is starting on Tuesday, and that could lead to some caution in the markets as investors attempt to divine what the picture for the fourth quarter really looks like.
All the upcoming results "should mean nervousness," said Jim Iuorio of TJM Institutional Services. "We don't like the unknown, and until we see the earnings print it's still unknown, so the market probably trades a little cautious" this week.
Q4 results are expected from health care companies like Johnson & Johnson (Tuesday) and Bristol-Myers Squibb (Friday), tech companies like IBM (Tuesday), United Tech (Wednesday), eBay (Wednesday) and Microsoft (Thursday), and consumer stalwarts like McDonald's (Thursday), Starbucks (Thursday) and Procter & Gamble (Friday). All in all, 65 S&P 500 companies and eight Dow components are set to report.
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"I'm looking into the earnings and I'm looking at revenue," said Anthony Grisanti of GRZ Energy. "If revenue this week starts to come out weak like it has in the past two quarter of earnings reports, then I think the market is going to have a significant move to the downside."
From the first quarter through the third quarter in 2013, 71 percent of companies beat their earnings estimates, but only 51 percent beat revenue estimates, according to FactSet. That led to the assertion that earnings rose not because the economy was improving (which would show up in increased sales) but due to more clever accounting and increased corporate buybacks.
While the market did not seem too concerned about that trend last year, Grisanti says that this quarter could be different, because it comes just as the Federal Reserve is beginning to taper its quantitative easing program.
"In the other two quarters, when revenue fell in weak, we had the Fed backstopping this market. Now the Fed is stepping back a little bit, and I think revenue will count more than ever," Grisanti said. "So if revenue starts to fall short, you should look to short this market."
(Read more: Why earnings might actually start to mean something)
But Iuorio points out that the Fed is still involved — and could put the taper on hold if need be.
"At the end of the day, if things start to deteriorate, then the taper goes away. There's still, at this point, the Fed 'put' in the market," Iuorio said.
Still, in the short-term, investors might be look to stop and evaluate as they watch corporate America's latest report card roll in.