Earnings Week: Buy the QID

The question you have to ask yourself this week is Can the Rally continue in Earnings week?

The coming week's flood of corporate earnings and important data on the housing market likely will bring the biggest test yet of whether traders have been correct in placing bets on a strengthening economy.

Like the latest run, the earlier pop came in a relative quiet stretch, before earnings reports began. But the traders and analysts who were burned in January by ugly fourth-quarter results appear more guarded. They've set expectations so low that most of the companies turning in results are beating Wall Street's forecasts.

Of the 52 companies in the Standard & Poor's 500 index that have so far issued reports on the first quarter, 32 have had numbers better than analysts expected, according to Thomson Reuters. A handful of the results were in line with expectations and 17 had reports that fell short of expectations.

The surprises have been fuel for the rally. The showing from banks in particular has helped ease some of investors' worries about the economy. Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Wells Fargo & Co. all had better-than-expected news in the past two weeks.

But with so many companies coming in ahead of analysts' forecasts, there is a danger that traders could start to hit the "sell" button if they're no longer impressed by companies that jump a low hurdle. And, this week, there will be far more companies reporting than in recent weeks so trading could be choppier as investors look for clues about what a company's results might signal for the economy.

Among the hundreds of companies due to report are 3M Co., Bank of America Corp., Boeing Co., Coca-Cola Co., DuPont, IBM Corp., McDonald's Corp., Merck & Co., Microsoft Corp. and United Technologies Corp., whose businesses include Otis elevators and Carrier air conditioners.

On Thursday and Friday, investors expect to get figures on sales of existing and new homes last month. A report is also due on demand for big-ticket manufactured goods.

The housing data could be a big force in shaping investors' attitudes, analysts say. A housing recovery is crucial to helping consumers feel more confident and to allow banks to put aside some worries about eroding asset values.

"If you're going to feel very positive about financials beyond the quarter, it does come down to whether you think the worst of housing is behind us," said Bob Browne, chief investment officer at Northern Trust Global Investments in Chicago.

Fellow Stockmasters, I for one am not convinced. We had a nice 6 week rally, but now that the numbers are coming out, things could get scary. Time to hedge your portfolio, my pick is the ProShares UltraShort QQQ (ETF) (Public, NYSE:QID).