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Dallas, TX
October 21, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Now What? What Does The Market Do When Good Earnings Drop Stocks?
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What's Hot Today: |
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U.S. stock index futures were lower on Wednesday morning.
Mostly upbeat earnings failed to rally stocks, continuing a disturbing
trend that seems to be taking hold of the market.
Today's Economic Calendar:
- Bank Reserve Settlement
- MBA Purchase Applications 7:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- Beige Book 2:00 PM ET
News For Thought
U.S. health care ranking bandied by Democrats is part of flawed study. One
of the central tenet of the U.S. health care "reform" effort is the fact
that the World Health Organization ranked the U.S. as 37th in health care
in the world.
Yet, according to The Wall Street Journal, the study on which the ranking is
based is "flawed" and "misleading" as "some public-health officials were skeptical
of the report from the outset." According to The Journal: "The ranking was faulted
because it judges health-care systems for problems -- cultural, behavioral, economic
-- that aren't controlled by health care."
In fact, the data from more recent studies is inconclusive. The Journal reports
that "some researchers say that factors beyond the control of the health-care
system are to blame, such as dietary habits. Studies that have attempted to exclude
these factors from the equation don't agree on whether the U.S. system looks
better or worse."
And here's the bottom line. The World Health Organization '"says the organization
has no plans to update the rankings, and adds, "We would not consider it current."'
Chicago: Most Stressed Out. According to Reuters: "A survey by Harris
Interactive found Chicago is the most stressed city in the nation, followed Houston,
Boston, Los Angeles and San Diego, while Miami is the least stressed, along with
Dallas/Fort Worth, Las Vegas, Cincinnati and Minneapolis."
SEC is going after dark pools. According to CNBC.com: The SEC will be
meeting today to consider regulation of dark pools. Dark pools are off the books
trading platforms used by institutions to unload large amounts of stocks without
taking big hits on the price, since the public doesn't see the trades.
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Now What? What Does The Market Do When Good Earnings Drop Stocks?
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Is Confidence An Issue For The Bulls?
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A bull’s greatest nightmare may be unfolding as the major indexes, especially
the S & P 500 (SPX) failed to rally when major companies are delivering
spectacular earnings reports on a regular basis.
Chart Courtesy of StockCharts.com
It’s well known that on Wall Street, it’s not what the news says but how
the market responds to the news. That means that unless things change,
the bulls may start to lose faith in this market. Apple beat the tar out
of analysts’ earnings expectations, and the stock rocketed higher. Yet,
the major indexes, especially the S & P 500 and the Nasdaq Composite,
where Apple is weighted, fell.
A similar thing happend last week with Goldman Sachs, where its blowout earnings
failed to rally stocks.
Still, on Tuesday, the market managed to pare a good portion of its early day
losses. But, unlike we saw several weeks ago, the recoveries from bad starts
to the trading day are not ending with gains, just smaller losses than when the
day started. That’s an important development, and one that has to be watched
carefully.
Today we have large amounts of earnings released. Most of the early ones, including
several from banks and drug companies beat expectations. Yet, the pre-market
futures barely moved.
In other words, the market is not imporessed. And why not? Stocks have rallied
well over 50% since the March bottom, which means that lots of positive developments
are already baked into prices.
At this point, much hinges on what the Federal Reserve says or does in the next
few weeks. So Today's Beige Book release may be a market mover.
Conclusion
Stocks are at a crucial juncture, as profit laden traders have to consider protecting
their gains after a good year. There is also a hedge fund, Galleon, whose founder
has been charged with insider trading, that is faced with redemptions. That means
portfolio liquidation and steady pressure on prices.
Here’s the bottom line. At this point, no significant technical damage has been
done to the major indexes. But, at some point, it could happen. That means that
previous resistance levels, such as 1040 on the S & P 500, which is now support,
is an important chart point. If the market breaks below that area, and does it
on big volume, with lots of force, we could see a move toward 1011 and possible
950. That would mean that in the process, the S & P500 would have taken out
both its 20 and 50-day moving averages. These two lines have essentially defined
the advance, having provided support for the indexes from the March bottom.
What does it all mean? Well, if the S & P 500 makes new highs in the next
few days, probably nothing. But if things start to stall out in this area, and
weakness ensues, we could be in for a significant correction in the stock market.
Does it affect our trading plan? No, it just shifts us into portfolio management
mode, where we study each individual holding and gauge whether each position
is worth keeping or selling.
A good way to decide whether to sell or not is by adjusting sell stops. See our
individual sections for guidance on that. Another important aspect of portfolio
management is to sell positions that are not acting well.
At this point, it's too early to consider short selling, either for portfolio
protection, or for gains if the market falls. But, we should be keeping that
option in mind. Let's see what develops.
Know when to sell. Get a detailed trading plan in your pocket. Read Dr.
Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books.
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Market Moves - Stock Of The Day
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Eli Lilly (NYSE: LLY) Beats Earnings, Shows Why Drug Stocks Are Gaining
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Eli Lilly (NYSE: LLY) beat its earnings and was gaining in early
market action on Wednesday.
Chart Courtesy of StockCharts.com
Lilly beat expectations on the back of its prescription drug
portfolio, including cancer drugs, and anti-depressants.
And why not? It's a stressful time, which means that Cymbalta,
Lilly's "fix-it" drug, which treats depression, chronic pain,
and the general heebie-jeebies of the times, is a major reason
for it.
Lilly was able to raise its revenues by, of all things, raising prices, as generic
competition in Germany was discountinued on its mental illness drug Zyprexa.
AS with other companies, Lilly is also thinning its work force, with 5500 job
cuts ahead for the drug giant.
The answer is clearly in the charts. Apple has had a good record of pulling back
to its 20-day moving average since its February bottom, and using that line as
a consolidation point. It did it again last week, using the average as a launching
pad for the current rally toward new highs.
The stock's trading pattern has not been very attractive, though. It has been
basing near 35 for several months and has significant resistance at 37.50, which
means that its path toward higher prices may still be rocky.
The take home message, though, is that drug stocks are starting to show increasing
amounts of relative strength in this market. See our health and biotech section
for drug stocks that have better chart patterns that Lilly at this point.
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