And so it begins. Just a few moments ago, Alcoa (AA) kicked off the second quarter earnings season by reporting a profit of 18 cents per share, topping estimates of 12 cents. The year-ago figure was 7 cents per share. Perhaps more important, the company maintained its expectation that aluminum demand was going to swell by 7% this year. Anyway, we'll break down Q2's projected earnings by individual sectors below, just to get a better feel for what to expect over the next five weeks. The first thing we need to get out of the way is the discussion of Tuesday's market action, which doled out more exasperation. Not frustration - exasperation. You'll see. Ugh You know how I'll occasionally get frustrated because traders can't seem to pace themselves? Tuesday was one of those days. As of yesterday, the market was primed to make a full-blown correction, IF the indices simply - quietly - walked lower. Nobody would have though to put up a fight. When the sellers dunk stocks in rapid-fire fashion though, it stirs up just enough buying interest to stave off a selloff... at least for a few days. It's not a problem for me personally, but it's the kind of thing that offers enough hope to lure a few people back in and then WHAM! The next leg of the pullback starts. Normally I'd use a chart of the S&P 500 to make my point, but the NASDAQ Composite does a better job of it today. We discussed this yesterday about the S&P 500, but the same idea applies to the NASDAQ - until the index (or indices) pull under the 20-day moving average, the uptrend is still technically intact. Care to guess what happened to the composite today? The NASDAQ merely tested the 20-day moving average line as a floor, and the bulls started to file back in again. The market still closed deep in the red, but the buyers made a stand right where they could make their best one. It's entirely possible the market could continue building on the intraday reversal effort from Tuesday. The VXN also pushed its luck a little too far on Tuesday, running up and into its key ceiling(s) at 14.3 before the advance ran out of steam. Now the VXN will likely need to retreat, rest, and then regroup before the next effort to push past 14.3. It would have been much simpler and faster for it to just move a little higher for three days in a row, and then subtly inch above 14.3. Whatever the case, notice how the volume spigots are starting to open now that the market's threatening a more significant correction. Our assessment doesn't change much, to tell the truth. It just changes the timing. We're still expecting a much more serious correction to come from all of this for all the reasons we discussed with you yesterday. But, the pause at the 20-day moving average line today may have bought the bulls a couple more days before the selling avalanche begins. Again, the 20-day moving average line is the make-or-break line for most of the major indices. We could talk downside targets, but I don't want to do that just yet... not enough time or room in this newsletter anyway. Besides, I don't have to. John Monroe over at the SmallCap Network Elite Opportunity laid out some logical downside targets. If you want really good opinion on where the selling could and should stop, I suggest trying out the EO service. Your free two-week trial gives you access to all the newsletter archives, which includes today's downside targets. Here's the dealio , or cut and paste this link: https://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/ I plan on talking about downside targets with you too, though I don't know when I'll be able to get to it for you. I may not get to talk about them until we're at them. We'll see. Hot Spots/Cold Spots While stocks as a whole are apt to be pushed around by the broad market's earnings beginning today, all of you investing veterans out there know the difference between being good and great at making money is in the details. A nickel here, a dime there... you do it several times a year, and all of a sudden you're outperforming the professionals. One of the details we know matters most is finding which sectors are poised to lead, and which ones are apt to struggle. To that end, we're going to once again look at the expected earnings growth rates for Q2 at a sector level. And for reference, we're going to show you the recent historical growth rates, and the near-term projected ones to boot. Like they say, read 'em and weep. As the table shows, the S&P 500's overall income is expected to grow 10.9% for the second quarter. The materials sector is projected to post a 46.8% improvement in its bottom line, but don't get too excited there - it's facing a rock-bottom comparable. Indeed, if I had to guess, that lofty goal is a setup for disappointment. At the other end of the spectrum the financial sector is expected to post a 2.8% decline in earnings. I think that's a setup for an upside surprise. Whatever the case, I have two observations worth keeping in mind not just for earnings season, but for the next year. The first one is, I don't doubt that healthcare's earnings are on pace to grow by double digits for the coming four quarters. The second observation is, I don't doubt the consumer discretionary is going to continue posting big growth, as it has for the past four quarters. All well and good, but strong growth rates are irrelevant if you have to spend a fortune to tap into them, right? Let's take a look at current, historical, and projected valuations, also at the sector level. Interestingly, the "high growth" areas of healthcare and discretionary are also the "high price" areas right now, with projected P/E ratios of 18.2 and 18.9, respectively. I don't like it, but given the choice, I'd rather pay for quality earnings growth than steer clear of it and settle for mediocre growth because it's cheap. That said, I'm also a long-term fan of the financial sector here because I see it as undervalued. I'll confess, however, my doubts about the pessimistic earnings forecasts for financials make it much easier for me to like the sector. Oh, and my favorite "easy to own" sector here is the industrials. Buy 'em and forget about 'em, you know? Anyway, we just wanted you to have a little extra perspective heading into earnings season. Some of these groups have too much expected of them, while others don't. It matters, because a stock's group drives 40% of its movement. This can be the beginning of a search for opportunities, even if we weren't at the beginning of earnings season. At the very least you can see how your pick stacks up against its sector peers. Rule of thumb: A stock's or sector's P/E ratio should match its earnings growth rate. For example, if a sector's typical growth rate is 10%, a fair P/E level would be 10.0. An annualized growth rate of 20% can justify a P/E of 20.0. Just a broad tip, to take or leave as you wish. That's all for now, but I have little doubt the market's current saga isn't going to be even more interesting tomorrow. So, stay tuned.