Apple Inc. (AAPL) posted an unsurprising earnings report Tuesday night. The numbers were roughly in line with lowered expectations and guidance for next quarter was cut. However, market players were expecting worse and that set up a very strong reaction. Even the bulls were surprised by the strong reaction to the mediocre numbers, but the tone of the conference call was upbeat and as the JPMorgan analyst stated here on Wednesday morning, "Volume risks are largely priced in the shares at current valuation."
The issue now is whether Apple can build on this favorable reaction. Typically, an inline report isn't the sort of news that leads to an uptrend even when expectations are low. However, Apple is considered a safe haven by many investors and this report does help to reassure those that have become emotionally attached to the stock over the years.
We'll see if there is willingness to chase Apple on a 5% gap-up open, but already there is a tremendous amount of scoffing at this reaction. It is a pretty classic case of managing expectations to produce a positive response even though all that really happened was a reduction in the numbers at Apple, which is a holding of Jim Cramer's Action Alerts PLUS charitable trust.
There is a mix of other reports out, there with a few good and a few bad. This earnings season generally has been negative, but the reaction of a few big-cap names has helped to keep the overall market tone positive.
The focus is going to shift quickly to the Federal Reserve's interest rate decision and the press conference that follows by Chairman Jerome Powell. No one is looking for a rate hike here on Wednesday, but the market will be trying to measure the extent of the Fed's recent dovish turn. The main focus will be talk that the Fed may slow or even halt the liquidation of its balance sheet. The Fed has stopped reinvesting the proceeds of various bonds and other instruments as they mature in the hope of normalizing its balance sheet, but now there are question as to what is normal.
The Fed gave the market what it wanted with the very dovish turn by Powell in December. Now the question is how much more the market wants from the Fed and whether the Fed is willing to hint at even more dovishness.
The market has not cared much for Chairman Powell so far and has sold off on every Fed decision day since he has become chairman. The computer algorithms are aware of that tendency and may be programmed for another negative reaction.
There is no shortage of news catalysts for this market, which means we have to stay intently focused on the price action. The market reaction, rather than the headlines, will tell us whether the news is good or bad.