Earnings Continue Upside Pressure on the Market

SUMMARY:
- Little news and the indices show the low to high action yet again.
- Earnings appear improving after a mid-season dry patch.
- A Greek deal is imminent, again.
- Dependency Programs consuming evermore of our funds.
- Earnings continue to push stocks, but with no resultant major upside moves in the indices, stay aware.

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Earnings continue the upside pressure on the market.

I will start with an individual stock versus one of the stock indices because it goes with the main theme of my talk tonight. That is, while there is not a lot of news to drive the market higher, the market is being driven higher by earnings news. It is not a tremendous run to the upside. As the indices show, they are barely scraping out any kind of gain at all, but they are nonetheless feeling that upside pressure. That is in large part due to something of resurgence in earnings. As you recall, this earnings season sported a lackluster performance with those below estimates trending above normal, while those above estimates with their results were trending below norm. That underscored that the recovery we have enjoyed in the economy may be under pressure. As of the last week or so, we have seen a renaissance of earnings and in the quality of earnings.

With BWLD there was a concern over the cost of wings going up. They were supposed to have doubled between the last Super Bowl and this one. That did not seem to hurt BWLD, however, as it flew to the upside with a 17% gain on the session. We did not bank 100% of that, of course. We took some off ahead of time, but we left a good chunk on that paid us handsomely on the day. We can say the same of RL. It announced a solid earnings result and posted a breakaway earnings gap. That also landed us some very nice returns in our positions.

Those are not the only two stocks giving returns to their investors and posted earnings that were better than expected. Once again, MCD pleased investors with Same Store Sales that rose 7.8% in the U.S. while they suffered overseas in Europe. My, how the times have changed. Just one or two quarters back, the U.S. was the problem for earnings while overseas earnings were fine. Now the worm has turned a bit, and the U.S. is providing support for some of these earnings. DIS performed well. It missed its revenues, but it had a very positive conference call about the U.S. and overseas numbers as well. They were not the only ones.

There have been many stocks coming up and performing very well. CERN is blasting to the upside on its results. We had a nice story from V. After hours the stock is exploding higher, trading at 111. Very solid, indeed. The same thing with CSCO. It was trading up, but then they had some cautious comments (as CSCO is want to do), and it faded back. SCSS has a nice earnings result and powered to the upside. Even TOY, which has already had a good run to earnings, helped itself out by raising its 2012 outlook.

It all started off with AAPL. Of course it just exploded to the upside, and it was still rising today and adding another $7.85 to its new all-time high. There was that initial good set of earnings, and then it was not so good. IBM, INTC, and MSFT were just fine, and AAPL was great. After that it had that slow period during the mid-earnings season. Now they seem to be picking up again. While that may not be providing a huge upside impetus to the market, it is providing upside pressure on a daily basis.

Looking at the charts, it is not an inspired move upside (last Friday’s surge was from the jobs report) but it has continued to move to the upside. SP500 is still not through its prior highs. The DJ30 is pushing up through its prior highs. Not anything great, but it is keeping the bias in place. The question becomes whether it will be able to continue the market move higher after a semi-pause where the move slows down, or if this is actually a process where the market peaks somewhat. We will look at that in more detail with the individual charts of the indices.

For the day I want you to note that the market started a bit higher. It gave the gain up, but then right before lunch it found its bottom and rallied into the close, pretty much closing at the session highs.

SP500, +0.22%; NASDAQ, +0.4%; Dow, +0.04%; SP600, +0.2%; SOX, +1.25; NASDAQ 100, +0.54%

The large cap techs provided most of the move. You can see why that was the case when looking at AAPL and CERN . After hours there was a fade back off of the highs. That after hours trade mirrors some of the action at CSCO it faded after hours as well as some reports about a Greek debt deal stalling. Everyone has been waiting this week for this imminent Greek deal. While there are drafts out there, there are no resolutions. Tonight it looks like there is a pension question that is you guessed it stalling the deal.

THURSDAY

Thursday it is back to the jobs issue with Initial Jobless Claims for the week. They are expected to move up slightly but hold near that 370K trend. We also have Wholesale Inventories. It will be interesting to see where they go. Recall that we had an inventory jump in the first iteration of the Q4 GDP. I am curious to see what they are like in December because that will factor into that report. They are expected to rise over the previous reading. That would make sense given the big build we saw in the first GDP iteration.

When looking at the action from here, there are still stocks that I feel can continue to move to the upside. A lot of stocks have gapped after earnings, and we like playing post-earnings gaps. Obviously we like playing them at the time of the gaps as well, as we have seen from stocks such as RL, and BWLD. They gave us nice gains. But that is more of a crapshoot at earnings. If we have a good gain built in and we have taken good gain off the table, we will often let a position ride through the results and do quite well. Other times it does not work as well. We let some of NTGR move through the earnings, and it gapped lower and dropped 5.73% on the session. It rallied nicely off of the lows, it held above the 50 day EMA, and it did not wreck its pattern. But now we have to be concerned about it and make sure it will hold up. If not, we will have to shepherd those remaining positions and preserve the gain on those.

We like playing into earnings, but we prefer playing after results. CPHD has gapped nicely on earnings, has moved laterally, and it is testing the 10 day EMA that has risen to catch up with it. That is often what starts the next move to the upside. That stock has rallied quite nicely. It came off of a rounded bottom and now it has consolidated. Are those types as solid now to carry the rally forward versus a stock like BTU that is down at the bottom of its selloff, is putting in a triangle, and is in position to break to the upside? When the market showed a lot of these, we knew there was plenty of room for the market to run to the upside because a lot of stocks had not broken higher out of the these patterns. At this juncture, there are more stocks that look akin to CPHD, that have run well, rather than BTU. We have played a lot of them along the way to the upside. ARAY announced earnings after hours, and it was doing quite well. That is a classic example of a stock that put in that rounded bottom and has put in a good run off of that pattern.

That is part of the game of investing. You have to factor in that the indices are bumping up against the highs breaking them but not racing through them and we have a lot of stocks that have put in good, solid moves to this juncture. That tells you that the risk/reward is not as good as it has been in the past. The risk/reward is fundamentally important in investing. You have to have the right kind of potential return from your plays or else they are not worth making.

If you trade a lot of positions where you stand to lose a dollar as easily as you gain a dollar on the position, then that is a losing proposition. You want to be able to gain $3 to every dollar of potential loss. With options that is a good minimum, and I prefer to have it higher than that. At this level, some of these plays cannot produce that kind of result at least without breaking through some resistance and having to run significantly further. This makes you uncomfortable when the indices are bumping up against the important prior highs. Breaking them, as I noted in some cases, but they are not racing through them.

It is about probabilities. What are the odds that I will make on this play? That is the number one important factor when you consider it. Each play has to stand on its own as far as the money you stand to make on that play. Then you have to factor in the status of the market overall and whether it will allow your play to make the run that you want it to make. BTU is showing that rounded bottom with the triangle. If it gets a breakout, it could easily run to these prior consolidation highs near 48-50. Where it is right now, that is not a bad risk/reward on the play. You have a pretty well-defined support level, you have a nice run to a target. It is positive, but then where is the market overall? We see the indices bumping up against the highs. Yes, the stock can make that run, but is the overall market going to allow it to do that? Will it give that stock dispensation to rise if the market decides to roll back down? The odds are no. It is this late starting the move, and the odds are it will not be able to withstand the market coming back on it.

At this juncture, that is why we still do not take a lot of full positions. We are still buying on good plays because the market keeps showing the right kind of action. But as I have said over the last couple of nights, you have to keep your eye on the door and know your exits. That is why we have stops at logical levels. That is why we keep taking gain on the moves higher. As you move toward a top, it is critical to lighten up positions that have big profit in them. Then do not let any of the later buys get out of hand to the downside. That is very important. Because when a turn comes it will test. You can stay around and wait and see. That is typically what you do with strong stocks if they hold key support and you have good gain already that you have taken. But on positions that you do not, and you have a good pad built in and you have not already taken gain, you have to be pretty judicious in protecting those positions so they do not upset the good gains you have had up to this point.

At this juncture, the indices are still receiving upside pressure from the earnings and just the general upside bias. They are melting higher, not racing higher. They are still at the prior peaks; they are not blasting through them. There are many leaders that have put on stellar runs and made us great money. That does not necessarily mean they will continue to do that. I often quote Roy McAvoy (which may seem strange given he was such an epic failure), “You ride her till she bucks ya.” You just have to be watching to get an idea of when she will buck ya so you are ready and not hurt bad.

With that somewhat hackneyed analogy, I will say that we are still looking at upside positions, but we are still buying less and less of them in terms of the amount we are putting to work. We are still taking gain off of the table, and we are very judiciously protecting positions. We are taking them off the table if they are not performing or are showing signs of trouble.