We've actually got a couple of shorter items to get through today. The first one is our response to the plunge in oil prices yesterday, after the Department of Energy announced better-than-expected inventories. A picture is worth a thousand words, so we'll show you what we like and don't like about the crude oil futures chart. Then we've got a special note in regards the relevance of earnings, from our Grand Slam Options portfolio manager Bob Lang.

Part 1: WHAT'S THE REAL DEAL WITH OIL?

The Department of Energy announced on Wednesday that the domestic inventory levels grew by 5.5 million barrels last week. Current stores are 9% above last year's levels. The immediate reaction? A huge drop in oil prices, of course. After all, with the supply up, the demand will be fully met, right? Well, maybe.....maybe not. Perhaps last year's levels were grossly inadequate, and an improvement still may fall short of what we need. I honestly don't remember what the supply/demand situation was last spring, but I remember that's about when crude prices started to move higher. So, our supply problems may or may not be resolved.

But the real question seems to be, where are oil prices headed next. A lot of folks think yesterday's price plunge is the beginning of a new era for lower oil prices. Skeptical, we wanted to see a price chart first to see if there was any real reason to think that $55 crude was a thing of the past. Why skeptical? I distinctly remember the exact same thing being said about oil at the beginning of the year - when oil had dropped to $42 per barrel. Three months later, not only had oil not moved lower, but crude was trading just under $60 per barrel. So much for the 'cheaper oil' theory.

Based on the chart below, I just can't see any real reason to celebrate. We've plotted the important support lines in green on our chart. The dashed line is the secondary support level, while the two solid lines are the more meaningful support lines; the lowest support line could be considered the 'absolute' support line. Maybe it's just me, but I don't really see a significant shift in the trend. In fact, oil could fall to $46, and it would still be within the normal trading range. And considering that gasoline supplies and distillate fuel supplies fell by a combined total of 1.7 barrels last week, our crude oil surplus isn't really quite as big as the market acted like it was.....5.5 million barrels of 'extra' crude minus a 1.7 million barrel decrease in auto fuels leaves a real net surplus of 3.8 million total barrels. It's respectable, but it's not going to end our energy woes. Take a look at the chart, and decide for yourself.

Crude Oil Prices - Daily

Part 2: EARNINGS -  DO THEY REALLY MATTER?  YES AND NO.
 
A lot of talk so far this earnings season about company performance from the first quarter.  As of now, it appears that several companies have beaten guidance either given by them or standardized by analysts.  But, is it really necessary to beat numbers to get your stock up?  What role does the future guidance play in the reaction?  Let's answer these and other questions below.
 
YESTERDAY'S PRICES FOR TODAY'S EARNINGS
 
Certainly you cannot argue with good company performance.  The economy has been growing at a nice clip since late 2003.  With an accomodative Fed and strong demand from consumers, businesses have pared down inventories and raised cash, likely for re-investment.  All good stuff for the long term.  When it comes to stock prices, we need to understand that the market discounts good performance...in most cases 6-9 months into the future.  What this means is that stock prices TODAY are reacting to what earnings will 'likely' be in the next 2-3 quarters.  So, while we've been hearing a lot of disappointment over stock performance with good earnings, understand that stocks rallied and zoomed higher 6 months ago...in ANTICIPATION of these good earnings.
 
WHAT THE FUTURE HOLDS
 
While the numbers posted are good, the outlook in most cases has not matched it.  You need not look any further than IBM to realize there may be trouble ahead for tech business.  There are a whole host of other names sounding the caution signal:  Dell, Ebay, Costco, General Motors...you name it.  To be fair, commodity prices have started to drop (save for oil)...and this may be a good thing for the economy next year.  But the market is clearly discounting future numbers....distributing stock at higher multiples in the hope that they will get cheaper yet.
 
BOTTOM LINE
 
So, don't get lulled into thinking stocks perform today based on today's earnings. If that were the case, stock prices would be more volatile than they are now (buy the news, sell the rumor).

Price Headley is the founder and chief analyst of BigTrends.com.