In recent newsletters I've cautioned about the lack of participation in the new highs being set by the indexes. While the S&P 500 was setting records, many quality stocks were struggling, or at least displaying complacency.
But I'm noticing another interesting pattern. In the past month and a half, we've had 3 pullbacks in the S&P 500: 5.1%, 4.8%, and currently 3.7%. However, many quality stocks are now not participating in the pullbacks.
Certainly some are. Priceline (PCLN) gained 2954% from late 2008 until early 2014. It is still a quality stock with a 47% Earnings Growth Rate and a 41% Return on Equity. But PCLN is currently down 27.6% from the 2014 highs, it closed yesterday below 14-month support, and the volume pattern suggests strong institutional selling. Hasbro (HAS), Garmin (GRMN), and Home Depot (HD) are struggling.
But take CVS, with its moderate 12% EPS, 13% ROE, and a P/E at the top of the range of the past 5 years. It did participate in the early January market pullback, but not the other two. In fact, it looks ready to set a new all-time closing high. The volume pattern suggests institutional accumulation.
The same goes for Brinker International (EAT) and Darden Restaurants (DRI), Disney (DIS), and Quest Diagnostics (DGX).
Seasonally, in a week or two, as we get over the ‘hump' of the earnings reports, the indexes, and many quality stocks, have strong positive track records. Take a basic industry stock like DuPont (DD). Due to announce earnings in the last week of January, over the following 13 weeks DD has gained an average 10.5%, with gains in 27 out of the past 31 years (87%!).
Ralph Lauren (RL) looks weak right now. But over the next 9 weeks, following its traditional early-February earnings release, RL has averaged an 8.4% gain, with only one loss in its 17 year history (a 94% success rate!)
Neither of these two companies have strong fundamentals right now, but they are two of many that have strong track records of gains right after the first earnings-release period of the year.
This year, a lot will depend on the overall picture painted by the earnings releases. One simple way I judge how the earnings announcements are going, and to get a good feel for the economy as well, is to go to briefing.com. At the end of each week, I click on Calendars, then Earnings, then the This Week link. I simply look for ‘how much green' – how many ‘Actuals' are displayed in green, which means reported earnings were above consensus estimates. I also take a quick glance at the Yr/Yr Rev numbers. Are they mostly healthy increases or decreases?
For yesterday, briefing.com showed me quite a bit of green, meaning positive earnings surprises are vastly outnumbering negative surprises. By doing this regularly through each earnings season I get an idea of what to expect in the near future. If I see a lot of green during the reporting period, meaning most companies reported positive earnings surprises, I will expect any subsequent market pullback to be short-lived. It is hard for institutions to commit to selling when most companies are raking in sales and earnings. They are more likely to ramp up their buying. While it is still early in this reporting period, so far I like what I see.
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.
Also on Market Tamer…
Follow Us on Facebook