Netflix (NFLX) and IBM (IBM) are two of the first major, non-financial stocks to report second-quarter earnings -- and both are receiving negative reactions so far. Netflix missed its goals for subscriber growth and IBM had slightly better-than-expected numbers, but that wasn't good enough to hold the initial gain. There were also reports from eBay (EBAY) , which is trading up, and Alcoa (AA) , which is down on its report.
The bears have been confident that slowing earnings growth was going to have a negative impact on a market that is trading close to all-time highs. The bulls have been mostly unconcerned and have placed their confidence in the Fed, which is almost certain to cut interest rates in the next two weeks.
Why worry about weak earnings when the Fed is going to unleash even more cheap capital that is going to be used to support equities? That is the rationale supporting this market. It works well on a general basis but is more problematic on a company-specific basis. Netflix Thursday morning is being viewed on the basis of its individual merits and its movement has little to do with the Fed's monetary policy.
Thursday night, there is an earnings report from Microsoft (MSFT) , which will be another test of the market's mood. Microsoft has been one of the better performers in the S&P 500 and is single-handedly responsible for a good amount of the gains in the indices. It is likely to have a solid report tonight, but will it see a "sell the news" reaction, like IBM is experiencing?
The reaction to Microsoft will tell us quite a bit about the technical health of the market. There was some technical damage done yesterday as the indices took out recent lows, but the DJIA is indicated slightly higher at the open -- despite IBM. There isn't much clear support for the S&P 500 right now, but the trend is still positive and there isn't any major distribution at this time.
Probably the most worrisome aspect of the market is that small-caps are lagging, which indicates a lack of speculative interest, while precious metals are leading, which indicates a desire for safety. Precious metals are not a group that makes for good leadership in a bull market as they are largely a function of currencies, interest rates and economic worries.
There is a case for increased caution after Netflix and IBM, so it's important to tighten stops and not let losses build. There are still some stock-picking opportunities, but stay very selective and manage trades tightly. There is no reason to believe the market is forming a top, but there is reason for increased vigilance.
