This is the anti-Charles Dickens market. It's a market of Not So Great Expectations, and when you have Not So Great Expectations you can really get this market rallying.
Of course, Dickens was not devoid of game. Those companies for which there had been Great Expectations and, à la the Stephen King of his era, the company has failed to deliver -- well, they get taken to the woodshed faster than you can say Mrs. Havisham.
Yes, when you are looking at stocks of companies that are flying all over the place and trying to figure out what's going on, you need to know what people are expecting. This, and not the numbers themselves, often decide the direction of a company's stock.
We need to drill down on this so you can understand that the market is not inherently rational. It can be stupid on a moment-to-moment basis, but it does come to its senses every now and then.
Let's start with a real household name. Let's start with Whirlpool (WHR). Here's a company that reported earnings this morning, and immediately the headlines pronounced its quarter a total dud. Quick summary? "Nine-cent earnings miss, misses on revenues." That's the contemporaneous summary I read within seconds of when the company reported. The stock immediately sank 3 points in premarket trading off that horrible miss.
But, upon further review, was it all that horrible?
Hardly. Because everyone I know expected Whirlpool to blow it, and I mean blow it big. Whirlpool has a huge Latin American business, and this was thought to have been a black hole because of all the problems down there. Nope. It had a huge quarter in that region because of very strong operating margins, and Whirpool also increased its free-cash-flow outlook. A company was supposed to screw up, and it didn't -- and, voila, you get a 10-point rise.
Or how about Buffalo Wild Wings (BWW)? This is a battleground stock. Bulls like to think of it as a national expansion play with a likeable, simple formula that works all over the country -- one that is leveraged to sports and beer, two national pastimes.
The bears like to think of it as a play on wings, meaning the price of chicken wings. Wing prices have skyrocketed this quarter, and that has set up the company for a dramatic shortfall. Whoops. The firm managed to beat expectations, and then it announced a terrific guide up -- not a guide down -- coupled with a 3% price increase. There goes the bear case. Oh, and adding short insult to short injury, this year's plummeting grain prices should lead to a bumper chicken crop next year, which stands to crater wing prices -- even as it's pretty unlikely the price increase will be rolled back at Buffalo Wild Wings. No wonder the stock's up $18.
Meantime, you never hear a good word about China these days. There's a perception that its economy is slowing down at a pace that nobody would have expected. Which is why Cummins (CMI), the big truck-engine maker, has been such a dog of late. The stock dropped from $160 in June to the $120s not long ago. How could it possibly do well? The expectations seemed to shrink by the day.
Well, it turns out that those who only looked at China -- which had been the big growth market for the company -- forgot about the U.S. Here, we're seeing a recovery that is far bigger than what people had thought, and this has allowed for a 19% price increase in heavy-duty trucks. That's how you get a 9-point gain in a single session.
Last week, ahead of its quarter, Parker Hannifin (PH) announced a big boost in its dividend and stock buyback, and the stock jumped 7. When that happened, I was disappointed that the Cleveland industrial hadn't waited until its report to announce all this. The thunder had been stolen, and expectations raised. Yet when the company reported its quarter, it was even better than anyone had thought, and the stock advanced another 5. This is a testament to how beaten-down these industrials had been ahead of this reporting period.
Then there's Spirit Airlines (SAVE), which will be featured on Mad Money tonight. Do you know that, two weeks ago, this company cut its forecast for today's earnings report because of an underpayment of fuel-excise taxes? When I read it I said to myself, "Oh, man, perhaps Spirit's getting crushed." How could its earnings not be so strong as to make this lapse meaningless? Others must have felt that way, too, because the stock got pummeled and subsequently sold off $10. Looks like the tax lapse was meaningless, though, as Spirit shot the lights out with its quarter today, and the stock has rocketed about $4.50. Yep: Forecast is cut, stock gets hammered, forecast is raised, stock soars.
Even huge stocks, stocks such as Apple (AAPL), can move when no one thinks there's some needle mover that turns out to be a big needle mover. I know there are lots of people who didn't think that Apple Pay could be huge. Talk about low expectations.
How about, though, if 1 million people have already signed up for Apple's payment system? I think customers will demand that retailers take Pay because of its security and its privacy, and I would not be surprised to see Walgreen (WAG) pick up share from rivals Rite Aid (RAD) and CVS (CVS) simply because the former has adopted Apple and the other two haven't. I think that Apple's stock is going up, because Pay may be the next big thing for a company that was supposed to be out of next big things.
Now, of course, the flip side is true, too, even on a big up day. It wasn't that long ago when Kohl's (KSS) announced it would have a big analyst meeting as part of what had looked to be a revival of a humdrum retailer that had been posting better and better numbers. Citigroup put out a piece a month ago on Kohl's titled, "Calling a juicy inflection connection in comps, upgrade to buy." Well, this morning we got an inflection point -- a negative inflection point: a warning of a sudden downturn in same-store sales at Kohl's. It was devastating. The stock, which had been at $61 at the time of the Citi call, is now at $54. That's what happens when there are too-great expectations.
Twitter (TWTR), too, was felled by too-great expectations. People believed the company's monthly average user growth was accelerating because of a series of changes that had made the site easier to use. Nope, not at all, and that's why the stock's gotten a real clubbing.
Then there's the sad case of Masco (MAS), the polar opposite of Whirlpool. Three weeks ago this kitchen-and-bath company announced a gigantic 50-million-share repurchase plan -- out of only 350 million shares -- and a terrific spinoff of its installation business. Yet this morning the company reported a shortfall, and the stock has stumbled badly. Whirlpool had low expectations, and this one had high ones. It explains everything.
Now, of course, every single day this stock market is made up of small-unit-combat skirmishes such as the ones we've seen today. Saleforce.com (CRM) has been gaining strength, though people have been betting that cloud computing is overdone. Then Morgan Stanley makes it a best idea, and Salesforce stock launches a couple of bucks, taking the whole group with it. GoPro (GPRO) is in free fall, as well, until Wedbush slaps a buy on it. Google (GOOGL) had been in free fall after its disappointing quarterly report, but ever since Yahoo! (YHOO) discussed its difficulties in search and advertising, people have been bidding up Google to where it is now -- above the level that had coincided with the so-called shortfall announcement.
Nevertheless, this market marches to the tune of expectations. If companies can keep them low enough, or if the market pummels them too much ahead of the quarter, you get a visceral vicious reaction either way. Today we got blowouts where we had expected little, and that's how you get these kinds of monster moves that have defined this incredibly bullish session.