THEY CALL THIS

a "good" earnings season? I'd hate to see a bad one.

Last week I discussed Yahoo, which was slammed after it met earnings expectations but delayed the introduction of its revenue-enhancing search upgrade. I thought the ensuing 20% plunge was an overreaction, an anomaly. It turns out it was just a warm-up for at least a week's worth of punishment.

Usually I like to watch the ticker while jogging on a treadmill, but last week it seemed every time I looked up I had to cringe. Instead of relatively minor moves, there was one crushing blow after another to stocks I own, have owned, or was thinking of buying. I could tell who had just reported earnings by the big percentage declines.

United Parcel Service, Amazon.com, Corning, Boeing all took drubbings on earnings that matched, came close to, or in some cases actually exceeded estimates. The Wall Street Journal noted last week that 3M shares had the biggest percentage drop in eight years and that UPS had its biggest one-day decline since going public. To me, most perplexing of all was semiconductor-equipment maker Cymer, which grew earnings 50% and whose stock promptly dropped $8, or 20%.

There were also lots of strong earnings last week, like AT&T's and Merck's. But did you see any double-digit gains in those stocks? Even gains in the oil sector, which yielded a bevy of positive earnings surprises, were confined to the single digits on a percentage basis and drew mostly yawns from traders.

I hate to dredge up bad memories, but the last time I remember an earnings season like this in which every minor disappointment was treated as a catastrophe and positive surprises were shrugged off was the eve of the bursting of the tech bubble back in 2000. This is certainly not 2000, since there's no bubble that I can see. But the reaction does suggest to me that this bull market is aging rapidly, and that the period of correction which began in April may not have run its course.

I'm not going to analyze all these earnings in detail. This is something you can do on your own, and it's a good exercise, since earnings are ultimately what determine what a stock is worth. It's important to remember that earnings are a look backwards, a slice of history. In some of these cases (Corning, for example), investors were clearly responding to the company's warnings about future quarters, since Corning's earnings tripled and actually beat analysts' forecasts. The market's reaction to earnings is largely about expectations. Some of these may be company or sector specific. Expectations for the Internet sector were obviously very high, so disappointments were swiftly punished, and even Google's positive surprise led to a modest decline in the stock price. Expectations for Big Oil were also high, so it wasn't much of a "surprise" that earnings were better than expected this quarter.

Still, it's hard to know when expectations have gotten out of line. Something so subjective is hard to measure, and so there are various proxies from consumer confidence to put/call ratios none of which seem to have captured the elusive target. For individual stocks, I like the price-to-earnings-growth ratio, or PEG, and start to get nervous when it's well above the market average. But none of the stocks that got hit so hard last week were even on my list of high PEG stocks, suggesting that expectations for the market as a whole had gotten out of line.

There's usually no point in selling, since the damage has already been done. So the question is, should you buy? Some of these stocks may well represent bargains at these new, lower price levels. In my experience, you have plenty of time to figure that out. Stocks that plunge on earnings news or forecasts almost never recover overnight. The momentum players will be long gone. You probably have at least until the next earnings season to decide, which will arrive in another three months.

When analyzing earnings, I try to understand why the market reacted as it did. Are the problems long or short term in nature? As a long-term investor, I'm not that concerned that Microsoft has delayed its new Vista operating system. To many on Wall Street, that's a catastrophe. Are the problems narrow and correctable, or are they broader sector or economic issues over which management has little control? Similarly, are costs the issue, which management may be able to correct, or are revenues weak, suggesting a slackening of demand? It's usually hazardous to bet against the market, so I never assume the market is wrong. But I have often seen it overreact to short-term issues, creating some of the "special situation" stocks on which I've made my biggest gains.

It's also important to keep these things in perspective. I like Google's stated philosophy that it manages for the long term, not quarterly earnings reports. That approach will no doubt be tested when Google has its first bad quarter, which still hasn't happened yet. As an avowed long-term investor, I try to take the same approach. I care much more about earnings trends over periods of years, not months.