After hours on Monday things got interesting with some heavyweight tech earnings reports. First, IBM (IBM) came out with a modest beat and raised guidance. However, with shares rallying non-stop into the report it is a “buy on rumor, sell on news” event.
Then came Apple (AAPL) up to the plate and knocked it out of the park (as expected). Profits came in at a whopping $4.64, thus blowing away the $4.05 estimate. After hours trading had to be halted 20 minutes for folks to digest the news. When it reopened shares were amazingly down 5-6%.
Heaven help the fools who just sold this stock. Clearly Apple and Google (GOOG) are in a league of their own as can be seen from this quarter’s reports. If you don’t own these stocks already, then congrats. Some mentally impaired investors just gave you a great chance to get onboard at attractive prices.
Given how much the market rallied into this earnings season it’s not that surprising to see so many “buy on rumor, sell the news” type reactions. The best thing to do is laugh it off and stay focused on estimate revisions. If they go higher, then the share price should follow soon enough. And if they head lower, then clear out of the stock and move on to greener pastures.
Now let’s turn our attention to the big picture for the market as a whole. Right now stocks are only 1.5% away from the recent highs of Dow 11,300. We could get there soon. Maybe push back for a couple days then make an assault on new highs. Meaning that I think the general level of earnings this season is good which sets into motion my predictions from last week’s commentary; Why I’m Getting Closer to 100% Long. Here is the important section from that article.
If earnings season is neutral to positive then the market may quickly push to the recent highs of Dow 11,300 given it’s still attractive relative value to bonds (based upon the earnings yield math I have shared in the past). When the market makes it to the old highs the media will make a big deal of it. This will reawaken many individual investors, who have been mostly on the sidelines because they got scared out by all the volatility.
Given human nature, investors will start chasing stocks as they will feel that once again "they are missing out". This new rush of money into the market may take us as high as Dow 12,000 which is probably too much too soon given the fundamentals of the market. And then we get a pretty hefty correction (10’ish percent).
One more thing to add to the above. If indeed the bond bubble starts to unravel, then money will flee from bonds and seek better rates of return. Gold and stocks will be the two prime beneficiaries. Especially large cap dividend paying stocks given that many of these folks will seek safer alternatives.
The past few days it sure looked like the bond bubble was on its way to bursting. Monday’s drop in rates puts that into question. If it starts up again soon, then it will be another great catalyst to move stocks towards Dow 12,000.
My Two Cents
(During the day I read many other investment articles of interest. Here are links to some new ones with my 2 cents added underneath).
All of the Fed Govs are in the media talking up the need for QE2. Odds are that they are dead set on doing it. However, if they are a sneaky bunch, then all this is a bluff. They are just talking rates down to lower the currency and thereby create inflation. And if successful, then they announce "Hey, QE2 not needed because the economy is just fine and not headed towards deflation". This would be great news for investors.
Again, odds are they will do QE2...but this other scenario has me intrigued.
Anybody who sells Apple given this report is a damn fool. The company beat estimates by over 10% on an equally impressive rise in revenues. Most everything is hitting on all pistons. If you want to say that iPad was light, then remember that they actually sold more this quarter than most analysts expected them to sell ALL of 2010.
On second thought, please sell your Apple shares tomorrow so I can pick up more at a lower price.
It certainly seems like markets are being manipulated, but I think that is a bigger problem for technical traders than fundamental investors.
Now I know I will get flamed for making such overly simplistic analysis. But here I go over the cliff anyway.
Technical traders look for signs of trends that worked in the past. Now someone is changing the game and trends start and end at odd times thus blunting the effectiveness of these previously profitable trading methods.
Fundamental investors try and stay focused on what a company is worth. It's like having a compass that points to true north no matter how many times the market spins you around. Granted it's not 100% accurate, but if the markets are being manipulated then an understanding of a company's inherent value will be a better guide of how to invest than looking for technical trends.
All technicians, please commence flaming me now.
Disclosure: I own Apple and Google.