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Stock Market Rallies On Upbeat Earnings Reports

|Includes: Apple Inc. (AAPL), DECK, EBAY, NFLX, PNC, USB, VRSK

Stocks which had been weighted down by concerns about a Spanish sovereign debt crisis rallied this week to close at 1,400 on the S&P 500 Index. Stock Futures sold off sharply, after hours, when Standard and Poor's lowered its credit rating on Spain's sovereign debt to BBB- from A. However, they have rallied above yesterday's highs and opened this morning at 1,403.

The push from better than expected earnings reports from Apple, Amazon, International Paper, Merck and many of the major financial institutions is being met by headwinds from fears over Spanish and Italian debt downgrades and the resultant drain on the European economies.

Last week we said

"Breaking out above 1,420 on the S & P 500 would take a confluence of favorable news including Apple reporting spectacular 1st quarter results on Tuesday April 24. Watch those earnings closely, as volatility will increase dramatically both before and after Apple's earnings report."

Apple did report spectacular 1st quarter results but the Spanish debt crisis lingers as a drag on the European economies and the U.S. stock market.

For these reasons the market will have difficulty breaking out of the 1,350 - 1,420 trading range. When the positive effects of 1st quarter earnings reports and up beat guidance from company managements subside, the market is likely to churn around and test recent lows.

How Do I Invest In a Trading Range Environment?

Continue to use periods of short-term weakness to buy strong stocks in strong industry groups. The Chaikin Power Gauge Ratings (see my rating methodology) make it easy to know what groups and stocks to focus on.

Recent examples of the success of the Power Gauge Ratings include Apple (NASDAQ:AAPL), eBay (NASDAQ:EBAY), PNC Financial (NYSE:PNC), U.S. Bancorp (NYSE:USB) and Verisk Analytics (NASDAQ:VRSK).

It is particularly important to use the current short-term market strength to weed out the worst performing stocks in your portfolio. Sell off the laggards, particularly those stocks with a bearish Chaikin Power Gauge Rating, and use the proceeds to buy stocks on weakness which have better potential.

Netflix (NASDAQ:NFLX) and Deckers Outdoor (NASDAQ:DECK) are two examples, just this past week, these are two examples of stocks where continuing bearish Power Gauge Ratings were followed by negative earnings surprises which pushed both stocks down 20% in overnight trading.

If you own stocks which have made new lows recently or have not rebounded with the market, there is probably a good reason. You may not know the reason, but this kind of negative price action is the tip off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.