Earnings Season- Sell The Rumor, Buy The News? – 4.17.14

 
In the few weeks leading up to earnings season we saw a decent amount of short-term technical damage in the market (you know the areas: mainly, Biotechs, Growth & Momentum stocks). Then earnings season began and we are now seeing the market bounce from deeply over sold levels. If this continues, this appears to be a classic case of sell the rumor and buy the news. Most market participants want to see how these troubled areas react to earnings. If they bounce and go higher- great. If not..well, not so great. As is usually the case on Wall Street (and the Fed)- most traders remain “data dependent.”  From my point of view, this appears to be another short term pullback within a broader uptrend. 

MON-WED: Bulls Quell Bearish Pressure

Stocks rallied on Monday after retail sales topped estimates. The Commerce Department said retail sales jumped 1.1% in March, hitting their highest level since 2012! A separate report showed that U.S. business inventories rose +0.4% in February versus a 0.5% estimate. In the middle of the day, the IBB (Biotech ETF) erased its gains and turned lower which dragged down the broader market. However, buyers showed up in the last 90 minutes and sent stocks higher into the close. Financial powerhouse, Citigroup (C) rallied after posting stronger than expected earnings in Q1. This caught many people off guard because Citi was largely believed to be one of the weaker names in this space.
Stocks rallied on Tuesday as investors digested the latest economic data and geo-political headlines. Before Tuesday’s open, US March consumer inflation data rose 0.2% vs 0.1% forecast. Federal Reserve Chair Janet Yellen spoke at the Atlanta Fed’s financial market conference in Georgia. Nobel laureate Joseph Stiglitz and Charles Plosser from the Philadelphia Fed also spoke and their rhetoric largely echoed the Fed’s “easy money” stance. Ukraine tensions flared up then eased after Putin calmed fears of immediate military action. Earlier in the day, pro-Russian protesters seized government offices and police stations in eastern Ukraine. Rumors spread that they want to secede and join Russia like Crimera did last month. Russian President Vladimir Putin denied Russian involvement in the incident which allayed fears after a skirmish erupted in the area. The Nasdaq composite and Russell 2000 small-cap index both bounced after testing their respective 200 DMA lines. The R2k briefly undercut its 200 DMA line before buyers showed up and defended that important area by the close.
Stocks rallied on Wednesday as investors digested another round of earnings and economic data. Bank of America (BAC) fell after the company’s bottom line was hurt by ongoing legal costs (most of which are hopefully over). Elsewhere, Housing starts increased 2.4% in March to 946,000 from an upwardly revised 920k in February, missing estimates for a gains of 955k. A separate report showed that Industrial production increased 0.7% in March after increasing an upwardly revised 1.2% (from 0.6%) in February.

Thurs & Fri’s Action: Buyers Are In Control

Stocks were relatively flat on Thursday as trading remained light ahead of the long weekend. General Electric (GE), Goldman Sachs (GS) and Morgan Stanley (MS) opened higher after reporting earnings. Shares of Chipotle (CMG) also opened higher but quickly turned lower a few hours into the session which suggests large investors were selling, not buying CMG. The market was closed on Friday in observance of Good Friday.

Market Outlook: Stocks Bounce

The action is getting better in the short-term and remains healthy in the intermediate and long term. Stepping back, the bull market is aging (turned 5 in March) which means the easy money from this cycle is probably behind us and it will get a lot more tricky as we move forward. As always, keep your losses small and never argue with the tape.