Three months ago Netflix (NFLX) started the first quarter earnings season with a very strong report and a very strong market response. It was one of the few stocks that was able to gain some momentum after it reported.
This quarter Netflix is not going to be the star of earnings season. There has been some nervousness that expectations may be too high and that turned out to be the case. Earnings per share was ahead of expectations and revenues were in line but third quarter estimates were cut and, most importantly, new subscriber additions missed the mark with 5.1 million additions vs. guidance of 6.2 million. That subscriber short fall is what sent investors running for the exits.
Netflix is trading down over 10% this morning but it still is up from where it was before the first quarter report. There are some analysts defending the stock and there may be some bargain hunters but Netflix is a tough stock to value and there is going to be a high level of uncertainty about its shorter term direction.
One positive for the market is that Netflix is a company-specific issue. Its subscriber shortfall isn't indicative of a broader trend like a big miss by a semiconductor company or issues with smart phones. Those reports are still to come and Netflix shouldn't be considered a harbinger of a lousy quarter for earnings.
The market's attention will quickly shift to other reports such as Johnson & Johnson (JNJ) which is trading down on an in-line report in the early going. Goldman Sachs (GS) is out and there will be a number of other major reports on Thursday.
Fed Chairman Jerome Powell is on deck as he begins two days of testimony in front of Congress. Powell has been indicating the economy is strong enough to handle some additional interest rate hikes especially since inflation remains under target levels. He is likely to be asked about the impact on the economy of the trade wars and that may actually be a market positive if he indicates that the Fed has some concerns about how that may effect economic growth.
Technically the market has had some struggles lately and it is time for some caution. Broad weakness on Monday was covered up by unusual strength in big banks. Bank of America (BAC) had its best one-day reaction to earnings in nearly seven years.
My major concern is the stodgy action in small caps. This was well illustrated in breadth that was nearly 2 to 1 negative. The pockets of strength were very sparse, and it looked like traders couldn't find much of a reason to put there cash at risk. It was a tough market in which to make progress and it will be even tougher if there isn't a better tone to earnings other than banks.