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
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!