"Catching a reaction or breakout in a strong trend is usually far more profitable on a risk/reward basis than catching the bottom or top of a market." --Mark Boucher, as quoted by Kevin Marder
This week will be the highlight of the fourth-quarter earnings season. We have reports due out from IBM (IBM) and Google (GOOG) tonight, Apple (AAPL) tomorrow and then Microsoft (MSFT) Thursday night. Apple will be the particularly important, as it will impact overall market sentiment to a great degree.
The big question for us to contemplate is whether the earnings reports this week will serve as the catalyst for the market top the bears have been predicting for weeks now. They are convinced that the major indices will roll over at any time, and they have no shortage of astute arguments to support their view.
The big problem for the bears is that the market just doesn't care very much about their worries and concerns right now. We are seeing another one of those V-shaped moves that kills the bears and drives the underinvested bulls crazy. There is very strong underlying support, and we have barely seen a pullback since stocks blasted higher on the first day of the new year.
One thing the bears have going for them is that, historically, the week after the Martin Luther King holiday doesn't tend to be very strong. There are also some very good catalysts for profit-taking if some of the key earnings reports are not so great. Apple is going to be very interesting, as expectations have come way down, but there is still concern that forward estimates will be cut. Betting on market direction this week is largely a bet on the Apple earnings report.
My primary thesis over the past couple weeks is captured in the quote I cited above. It is far easier to make money trading with the trend than it is to constantly attempt to look for market turns. At some point you may be stung when the reversal occurs, but generally you will have a big enough cushion of profits to prevent major damage. In fact, I believe that the money you make by not fighting the trend will put you so far ahead of the top-callers that it won't matter if you have to take some stops and losses on a reversal.
If you want to worry about this market, you can find plenty of things. The bears are particularly focused on the very bullish sentiment that seems to exist. This is a contrary indicator, because the more bullish people are, the more likely it is that they have already invested their cash and that there isn't much left to drive the market higher.
The problem with sentiment as a contrary indicator is that it's almost impossible to use it to time the market with any degree of precision. Stocks will often run for a long period amid an upbeat mood. That's particularly so when individual investors are just starting to come back to the market, which seems to have been the case recently.
So my contention is that the arguments are irrelevant until there is some price action to support them. Will earnings this week be the catalyst that kills the market? Maybe, but I'm going to wait for the numbers and some price action before I react.
We're seeing a quiet start this morning, and I'll be looking for some positioning in front of the major reports.