Warily Watching Earnings

 | Apr 23, 2014 | 4:41 PM EDT
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After a six-day run-up, a little profit-taking finally kicked in and reminded market players that it is possible for the market to take a rest. The lopsided, V-shaped moves have become so common that it surprises some folks when we have minor dips. The fear, of course, is that the pullback will turn into a failed bounce, but there is no reason to believe that the poor action today was anything more than normal volatility.

Earnings now move into the forefront, and so far Facebook (FB) has a decent beat and is up a little, but the critics are looking hard for flaws in the report that they can exploit. Apple (AAPL) is coming up, and, while it doesn't have the same excitement it used to, it will still be a good measure of overall market sentiment.

While the pullback today was pretty mild, it did bother me how poorly momentum stocks acted again. The rotation out of those names and some of the hot groups is what produced the ugly plunge in many stocks over the last month or so. They have bounced back a bit over the past week, but they need to build some support and hold the recent lows. If we retest those levels again, it is likely to be a very ugly spring.

So far, earnings are OK, and the indices are up slightly after hours. The market can afford a bit more profit-taking, but a poor reaction to earnings will present a major hurdle to further upside. Have a good evening. I'll see you tomorrow.


April 23, 2014 | 1:58 PM EDT

Beware of a Rotation

  • It could wreak havoc if it picks up steam.


The indices are enjoying a little rest today but there is rotational action under the surface. Oil and defensive stocks are holding up the NYSE and momentum and technology names are hurting the Nasdaq. NYSE breadth is running 17 to 13 positive while Nasdaq breadth is running 9 to 15 negative.

We needed a rest after six straight positive days but we have to watch for this rotational action to pick up again. It is what really caused damage a month ago and could wreak havoc again should it pick up steam.

One big concern today is that none of the stocks with strong earnings reports have held up. Even Yum! Brands (YUM), which looked quite good and gapped up big, is now solidly in the red. We need a more positive response to earnings to keep growth stocks moving.

The earnings report from Apple (AAPL) used to be the most important in the market but now I believe the report from Facebook (FB) is more important. Both companies report earnings tonight and will give us good insight into market sentiment. Expectations have risen lately for FB while they have come down to AAPL. We can no longer count on AAPL to blow away its low-ball estimates, but FB has put together a couple of good reports and is going to need a good beat to keep it running.

The action is not very attractive but it really is nothing more than routine profit-taking. If earnings tonight don't receive a positive response, then concerns about this bounce failing are going to expand very quickly. I'm holding off on new buys for now.

April 23, 2014 | 10:42 AM EDT

Sitting on My Hands for Now

  • I won't be doing much until I see signs of underlying support.

Tuesday's weak close foreshadowed the poor action this morning. We saw a few good earnings reports, but there was nothing exceptional, and now the market is being hit by a much-worse-than-expected new-home-sales number. The excuse for the miss is that there's a lack of supply and a labor shortage, but that rings a bit hollow.

Given the six-session run in the market, it actually makes sense to see some backing and filling, but that sort of logic has been missing for a very long time. It would be quite healthy if the market actually underwent some digestive action and built a base before it attacked recent highs, but usually the dip-buyers are so overanxious that this never happens.

Breadth isn't too bad -- 1900 gainers to 3200 losers -- but my momentum screens are almost completely red, and biotechnology is taking a pretty good hit after a big bounce yesterday. Oil-related names are showing the best relative strength at the moment.

I've taken a few stops and cut a number of positions. I've made up some ground lately, but my portfolio is still slightly off its all-time highs, so I'm going to play very tight defense and try not to give much back. I made one addition this morning: Vertex Energy (VTNR), which was a prior stock of the week, and whose shares are currently building a base on good volume.

Other than that, I'm not doing much as I wait for some signs of underlying support.

April 23, 2014 | 8:11 AM EDT

Undermining the V-Shaped Pattern

  • Investors embrace this move but that will eventually modify it.

"There are only patterns, patterns on top of patterns, patterns that affect other patterns. Patterns hidden by patterns. Patterns within patterns... What we call chaos is just patterns we haven't recognized. What we call random is just patterns we can't decipher. What we can't understand we call nonsense. What we can't read we call gibberish. There is no free will. There are no variables."-- Chuck Palahniuk

After a six-day run the market is at a point where a rest seems logical. The indices are a bit overbought and recent buyers have some good gains to protect, but that sort of logic has often been a mistake in this market.

Since the market low in March 2009, the single biggest shift in the market action has been the inclination toward lopsided action to the upside. Instead of a normal ebb and flow as bouts of profit taking occur, we go straight up and then go straight up some more. If you try to guess when the market will top or look for pullbacks, you find yourself on the sidelines with plenty of idle cash.

We are at the point now where the S&P500 and DJIA are close to pushing back to the all-time highs that they hit in early April. This V-shaped move looks quite different, however, than the one we had back in February and the prior one back in October and November of 2013.

The big difference this time is that the Nasdaq and Russell 2000  have lagged badly and the key momentum stocks and sectors have been very slow in turning back up. Over the last few days we have seen names like Tesla (TSLA) and Facebook (FB) come to life. Biotechnology and solar energy have moved off their lows but they have massively underperformed the conservative big-caps that are leading the senior indices.

The bulls hope that the growth and momentum names will regain their leadership role and help the Nasdaq and RUT produce some relative strength with the DJIA and S&P500 hold steady. Good earnings from stocks like Netflix (NFLX) will help but the report from FB tonight will be particularly important..

Market players have seen these V-shaped moves often enough that they no longer seem surprised by them. Rather than fight them, investors are embracing this sort of action, but ultimately that is the behavior that will cause the market to shift its behavior. The more market players anticipate and embrace a certain pattern of price action, the more they will undermine the pattern.

If everyone expects V-shaped action it is a self-fulfilling prophecy for a while. But eventually more and more traders will try to stay one step ahead by buying faster and taking profits sooner. The more traders try to exploit a known pattern the less likely it will continue in the same form.

We had a weak finish Tuesday that may signal a little nervousness about the market's ability to keep running up. But earnings are looking pretty good and the V-shaped move has helped to create plenty of potential dip buyers. The focus will be on FB earnings tonight, but continued recovery in biotechnology, TSLA and other momentum names are going to be the key to the market at this point.

We have a slightly soft open but that has been a good setup for the market recently as buyers slowly inch in after the open.

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