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In two recent articles here and here, I cautioned investors to look at how the market responds to the arrival of news, especially earnings reports. Specifically:

  • if good news is released and the stock fails to make any reasonable gain, the implications are bearish.
  • if bad news is released and the stock holds up well or even advances in price, the implications may be bullish.

I thought I would look at what verdict Mr. Market is rendering now that we are a significant ways into earnings season. While many companies have released earnings, I concentrated on large Blue Chip industrial stocks, including a few in the Dow Jones Industrial Average or its SPDR ETF (NYSEARCA:DIA).

All the companies below have beat earnings estimates (source: Etrade). To provide some details about the market "verdict," I look at how prices responded in the first half hour after the release, and how prices have done since that time. If earnings were released before the open, this is the first half hour of trading on that day. If they were released after the close, it is the first half hour of trading the next morning. I do this to separate the response of "short-term" ("dumb?") money from longer-term ("smart?") money.

The companies chosen are Monsanto (NYSE:MON), JPMorgan Chase, (NYSE:JPM), Bank of America (NYSE:BAC), Goldman Sachs Group (NYSE:GS), UnitedHealth Group (NYSE:UNH), Johnson & Johnson (JNJ) and Verizon (NYSE:VZ). These are all blue chips, sensitive to economic activity, and actively traded so their price movement is not subject to unusual swings by short-sellers or special events. All beat earnings estimates by a penny or more for the fourth quarter.

Also in the table below the comment "sharply higher" or lower is a subjective assessment of how much the stock moved, given a quick glance at how traditionally volatile the shares are.

Response to Positive Earnings Surprises

DateStockResponse First Half hourResponse Since That first Half Hour
8thMONSharply higherlower, then flat in recent trades
14thJPMUp then flathigher but back even since
15thBACSharply higherdrifting slightly lower
16thGSSharply lowerlower still
16thUNHSharply lowerflat to slightly higher
21stJNJSharply lowerflat

An overall assessment is pretty grim. Even those stocks that responded favorably at first to higher share net seem to have mounted no sustained follow through. Several others weakened immediately and have continued still lower.

While there is more to a quarterly report than earnings - revenue, margins, guidance and other things - the earnings per share number is the bottom line, and easiest to use for a study such as this one.

Yes, we also know that earnings "expectations" can be coached/manipulated higher or lower by press releases and corporate spokesmen. True: but many companies have already tempered earnings expectations for the 4th quarter. So far, Mr. Market doesn't think this has been enough. The overall tone of trading in these stocks suggests market weakness in the foreseeable future - perhaps even until next quarter or beyond.

More companies are releasing daily and the pace will quicken over the next two weeks or so. I will update this article soon as more Dow Stocks and blue chips report.

Source: Good News Not Good Enough: An Early Glance At Post Earnings Performance