Never look a gift horse in the mouth!
If you are long it was a good day. Yesterday was even better. The positive earnings reports have proved to be a healing tonic for the weak market. The positive surprises have energized investors with hopes of "me too" results for companies that have not yet announced. The many earnings warnings had depressed expectations for tech earnings but these expectations are being beaten in almost every case. The Nasdaq is reacting with a standing ovation. The Dow is suffering from a tech deficiency as money previously resting in defensive drug and cyclical stocks has started moving into the Nasdaq. The Nasdaq has broken out of the recent trading range and has twice closed above the previous high from June of 4073 and is now actually up +2.5% for the year.
The good news bad news story for the day was the sprint to new highs for the Nasdaq on strong volume of almost 1.9 billion shares. The bad news was the laggard Dow which has stalled for the last three days at 10800 on very strong volume of over one billion shares. The advance/decline line on the NYSE had been positive for the last seven days and was in danger of breaking that trend today. A last minute spurt pushed it to a positive 1459 advances to 1419 declines. Nothing to write home about but on the score board it is still a win.
You would think the analysts were asleep with major companies not only beating estimates but blowing them away severely. For example JP Morgan raked in $2.90 per share when analysts were only expecting $2.45. Add in record earnings by companies like PMCS, AMCC, ARBA, GE, JNPR, GTW, etc and worries about a hard landing and slower profits were pushed onto the back burner. Positive statements like those from the AMCC CEO, "these profits will continue as far as the eye can see. We have much more business than we can handle" have built a fire under these stocks. Talk about a positive conference call!
Before you start throwing money at everything with a four letter symbol you should take note that the Nasdaq big cap leaders were only "just positive" and are not taking part in the rally. Dell is maintaining momentum at $52.88 but is slowing. CSCO was the most actively traded Nasdaq stock but only managed a +1.38 for the day. Microsoft has lost momentum and appears stuck in a trading range around $80 and was negative -.38 for the day. Intel managed to gain +2 on good earnings from fellow chip stocks but closed almost -$2 off the high of the day. ORCL barely managed to close positive and SUNW only managed a +.56 on slowing gains. It is clearly a stock pickers market. Those that guess right are rewarded with stellar gains. AMCC +28, ARBA +27, but guess wrong and you are toast. PMCS announced great earnings but dropped -$14 in after hours. Same with SONS and a -$8 drop on top of -$10 for the day. XTND announced preliminary results after the close and investors did not like the outcome. After closing at $86.69 XTND traded as low as $57 in after hours for a -$30 drop. If you like living dangerously holding over an earnings report is equivalent to Russian roulette with your investment capital. If you do it, make sure it is money you can afford to lose.
John Murphy got some face time today on the local stock channel with a forecast of 4450-4475 in the next two weeks but warned that Late July and August could be a little rocky. I am on your side John. With earnings coming in close to +20% it makes investors wonder what all the racket was last month. Interest rate hikes are over(?) and investors have put the slowing economy out of their mind. Sure profits will slow but still be outstanding. Now, don't let visions of sugar plums cloud your vision. Easy come, easy go. With the Nasdaq churning up a good head of frothy expectations it will only take one or two high profile disasters to burst the bubbles. Also, don't forget we have the PPI report on Friday which could put Fed dread right back on top of investor concerns. The PPI is expected to come in at a strong +.6% on the surface but only +.1% for the core rate. I don't think a stronger number will seriously dent the investor optimism immediately but just bring the storm clouds back closer to the picnic. On the positive side, if the number comes in weaker than expected the market will not only grow legs but those legs will be wearing track shoes with a swoosh on them. As evidenced by the +143 gain on Wednesday there is money on the sidelines and closing over important technical levels is all that is needed to trigger those funds.
Not all was rosy on the floor today. Money came pouring out of drugs and biotechs as the formerly "safe haven" for defensive players was seen as suddenly out of vogue. Retail was also a wasteland the day before the Retail Sales Report. Bank of America helped my prediction for the sector from last week come true today with a warnings that the retail sector rally was unsustainable and cautioned investors.
The stock splitters were active with ALTR announcing a 2:1 after the close. Also CDT 3:2, WAT 2:1, NMSS 2:1 and not to be left out was BBBY with a 2:1. Strangely BBBY is only trading at $42. That is only -$3 from an all time high but not normally a range known for stock splits.
The ARBA earnings set fire to the B2B sector with gains not seen since March. OOPS! Hope I did not jinx that! ITWO +18, AKAM +13, CMRC +8, FMKT +9 and almost tieing the sector winner was EPNY +26.50. Of course the +27 for ARBA was not the leader! Now, would you expect a +46 two day gain to be sustainable on a $100 stock? (EPNY) Each of these with the exception of ARBA had been trading listlessly for some time.
As traders we need to be profiting from this rally but with an eye on the eventual roll over possibility. With the Nasdaq up +1150 points since late May and the summer doldrums still ahead of us there is a great chance of some rocky days ahead. I am still focused on the end of next week and options expirations along with slowing earnings announcements. Once earnings lose their bloom and options expire there is nothing to keep investor attention. August, September and (shudder) October are not known as stellar investing months. I am not saying pull back into your shell and hibernate for the rest of the summer, just keep your eyes open for the next dip. Don't try to ride it out but consider it a buying opportunity for the next leg up. Just wait for the "up."
We have some serious economic reports ahead and profit taking can occur at any time. Mr. Greenspan gets to entertain us with the July version of his Humphrey Hawkins Testimony next week and you never know what will happen when Alan goes to bat. The VIX is still hovering in the warning zone and the put/call ratios are moving decidedly into over bought and bearish.
Trade smart and sell too soon.
Current long positions include: none