I do not believe the markets are on stable ground. Yes, we've seen a good rebound off the August correction. The S&P 500 fell 12.5% during the summer, and has since rebounded by 11.4% (Note: that doesn't mean the S&P 500 is back near its previous high). Volume has been decent during the rebound, but it hasn't been of the level we would see if institutions were buying heavily.
It appears that corporate earnings, on average, have declined this quarter. So with a decline in the momentum of the economy, and many top-name stocks advancing on average or below-average volume, I have to wonder how long this rebound can last. If someone is worried about missing this rally and asks me if they should increase their exposure to stocks, I will respond “Do you believe?”
Take Alphabet Inc (GOOG), ‘the company formerly known as Google'. In July, Google's earnings beat expectations by 4.3%, and the stock gapped-up 16.3%. Last Thursday, Alphabet beat earnings by 1.9%, and the stock gapped-up 12%:
Stockcharts.com's article on Gaps and Gap Analysis states “Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.“
“…if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up. Prices drop, and a significant change in trend occurs”
So the stock has jumped 41% since mid-July. But Alphabet/Google's track record shows only a 14% growth rate in earnings, and maybe a 12% growth rate in revenue:
The markets are supposed to be anticipatory. But if you are wondering if you should jump on the Alphabet train, I will ask, “Do you believe? Do you believe a 41% jump in the stock is justified by a 12% annual growth rate?” The stock doesn't even pay dividends.
One final note. With a 41% jump in the stock price, institutions must be jumping on this stock like crazy, right?
Umm, not quite. The number of funds holding GOOG has barely changed:
So who is buying GOOG?
There are many more examples. Take El du Pont de Nemours & Co (DD). DD dropped 38% from March into October. The stock has rebounded 32%:
Yes, duPont did beat earnings expectations yesterday, reporting $0.13 to the consensus $0.10. But are investors really expecting that much of an improvement in duPont's business to justify a 32% jump in the stock? The earnings and revenue track record doesn't show a company firing on all cylinders, at least up to this point:
And like Alphabet/Google, institutions haven't piled in:
So who is doing all the buying, and how long will it last?
Do you believe?
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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