As the market heads into the meat of earnings season there is a bit of stalling action in the indices after a huge run. Solid reports from Goldman Sachs Group Inc. (GS) and Bank of America Corp. (BA) helped to keep things positive on Wednesday and breadth was strong again, but the momentum in growth stocks faded as the day progressed and the indices closed slightly soft.
After their big run since the Dec. 24 lows the indices are entitled to a rest. The rally likely has extended further than normal due to a high level of skepticism about an easy recovery after the ugly fourth quarter, but the mood has become complacent after a bounce that has lasted nearly three weeks. The folks who worried about an extended bear market in December are now completely unconcerned, and that is a warning sign.
There are a couple more earnings reports coming up from banks here on Thursday morning with Morgan Stanley (MS) being the most important, but tonight we shift to reports from growth companies as Netflix Inc. (NFLX) kicks things off.
Last quarter Netflix was one of the best big-cap reports. The stock gapped up on its number, but the overall market correct had begun and the stock sold off steadily for the next two months.
There is quite a different setup this time, with the stock moving up strongly into the report. It is very close to the levels it hit after the last report but it is overbought, and expectations have risen after the announcement of a coming price increase.
The reaction to NFLX tonight will provide some clues as to whether the market is in a "sell the news" mood or a "the bad news is all priced in already" mood. Banks stumbled on their reports at first, but the market has taken a more upbeat approach to them the last two days as the belief that the worst for the group might be over has grown.
There is an interesting confluence of events occurring as earnings season heats up at the same time the indices approach some major technical hurdles. Earnings news likely will receive the blame for whatever happens next, but market players also are watching the government shutdown as a possible catalyst for a market move. A resolution there likely would bring at least a short-term pop even though the market hasn't sold off on the news at all.
I have had a difficult time embracing the upside recently because I've found few good entry points as this bounce has extended, so I'm not unhappy to see some downside. The big question is how quickly and how aggressively will support occur. I don't envision a retest of the recent lows any time soon, but there has been such a big run there could be a substantial drop before support occurs.
A very poor report from Morgan Stanley is hitting and that is sending the indices down in the early going. The market has shrugged off other poor earnings in the sector, but Goldman Sachs raised the bar on Wednesday so it may be more difficult now to bounce back.
This market is at a tricky juncture as earnings season heats up. There will be some easy catalysts for quick moves, so stay extra vigilant.