Complacency Between Earnings

By Duru

February 6, 2005


As I sit here anxiously awaiting the start of the Superbowl, I am struck by the parallels of the earnings season and the football playoffs. OK - I am stretching things here, but the relationship is a convenient one to draw. Over the past few years, it seems a lot of angst surrounds earnings and then after the bulk of the big companies report, the market settles back into general complacency. I hope to turn transform this observation from anecdote to data-driven, but I relatively comfortable with my intuition on this one. All the hype and excitement throughout the football playoffs explodes into one climax (often anti-climax) with the Superbowl and after the Pro Bowl, we football fans settle back into a state of sports lethargy. And as the playoffs were reaching crescendo, earnings were doing the same until a final climax last Friday featuring an impressive cap to the market's attempt to recover from January's series of sell-offs. I suspect that the relief from earnings pressures will further encourage the buyers and disinterest the sellers.

Here is what I see now (please see disclaimer here):

First of all, I am seeing some nice new highs that were punched out on Friday. These show-offs include some Apple plays, the housing stocks (like PHM and KBH), MACR, MSO, COO, AZO, IMAX, and ERTS. Some recent new highs that look impressive include JWN and VLO. I am also seeing some nice comeback charts that have finally broken 200DMAs such as LSI, AUO, and COCO and some that are getting close to similar break-outs, like PBY. ADBE and KMRT have made resounding comebacks from scary dips below their 50DMAs, and I look to formerly strong ADSK and IBM to make similar moves in the near future. Hey, I am even looking for EBAY finally to punch out a (temporary?) bottom here at around $75.

I am fully aware that January's selling has created some extremely ugly looking charts, but sometimes looking for the few gems points the way to opportunity better than wallowing in the common misery that abounds. So, my intuition is telling me to be bullish for the short-term (meaning until the next earnings cycle). Some quick and convincing follow-through from Friday's big pop would solidify my now complacent feet.

The indices are also telling some very interesting stories. The S&P 500 and the Dow Industrials made nice pops back above their 50DMAs. Now that the NASDAQ has conquered that nasty gap down from January, I am looking for the index to follow the lead of the Dow and S&P to soon leap over its 50DMA. I suppose the future also holds a re-test of the January high, but I sense that this test will ultimately fail. Amazingly, the S&P 600 (small cap stocks) continues to confound the pundits who year-after-year have been waiting for the big-cap stocks to retake leadership status in the market. On Friday, the small caps pushed right to the edge of making yet another all-time high. The Advance/Decline line is making new 52-week highs. And despite all the angst about the health of the American consumer, the retail index is hanging in there with a nice consolidation pattern that could easily lead to a sustainable rally in the not too distant future. However, the VIX's collapse to new lows on Friday tempers my enthusiasm. I suspect that volatility will need to make some kind of bounce here before the good times can continue to roll.

One of my own personal surprises has been the dollar. Its snapback rally has turned into a mini-rally that has held gold in check. But given that gold has not yet completely fallen apart and separated from the 200DMA, and given that 10-year treasury rates continue to languish, I suspect that the dollar's good times will be short-lived.

Regardless of how things play out, as always, be careful out there!


DrDuru, 2005