Another week for the bears. Momentum stocks continue to lead on the downside. The St50 index lost 1.98% as this earnings season continues to obliterate long-term trends.
Earnings reports often play the role of tipping points and they could start, accelerate and put an end to a trend.
But if you look under the surface, there is some evidence of improving market sentiment, which might put the foundation for a year-end market rally:
1) $QQQ managed to close the week above the very important from psychological point of view level of $65, which in this case coincides with its rising 200dma. Just when everyone expected a complete breakdown on Friday, the tech sector rallied on decent volume. $SPY is still trading above its rising 100dma, which is normal as in market correction dividend paying large caps and defensive stocks tend to outperform. Both $SPY and $QQQ should still be considered “guilty until proven innocent” and need a lot more work to do to repair the technical damage done in the past few weeks.
2) We saw some examples of positive market reaction to bad news. Let’s not sugarcoated it. After $GOOG the previous week, $AAPL and $AMZN also reported horrible earnings, essentially leaving the tech sector without leadership. Mr. Market had somehow discounted that as both $AAPL and $AMZN were down about 10% in the month preceding their reports.
$AMZN missed estimates for second quarter in a raw and it rallied, which only comes to remind us that the majority of its shareholders have an investing horizon much longer than a quarter and Jeff Bezos still has their blind trust.
Apple missed and guided lower and yet, it held its rising 200dma. In the grand scheme of things, that was a totally irrelevant quarter for Apple and it didn’t reveal anything that the market hasn’t already known. Hence, the timid market reaction to the miss.
3) There are some new long setups showing up:
I have often talked about the silver lining of market corrections – they allow us to spot potential future winners. Those stocks that manage to rally to new highs while the market averages are in correction mode should be considered prime candidates for future market leaders. Last week produced a few such stocks.
All 3D-printing stocks – $DDD, $SSYS and $PRLB, rallied hard despite the general market falling apart in the background. 3D Systems blew away the market estimates and guided higher, finishing the week less than 10% below its all-time high. Stratasys did not report earnings, but it gained on the back of a strong report from 3D Systems. It looks promising on all-tie frames and it closed the week less than 7% below its all-time high.
Both 3D Systems and Stratasys are wisely using their currency (shares) to make sure that they stay on the top of the innovation edge in the industry by acquiring smaller privately-owned competitors around the world. $PRLB is a recent IPO and it is not on the St50 list, but they reported much better than expected earnings on Thursday and rallied almost 20% on the news.
There are only three publicly traded 3D-printing stocks right now with a total market cap $4.7Bn. They are on their way to become story stocks, which means that a lot more potential demand is about to be unleashed.
The market is still in a correction mode and in such environment “less is more”. I will continue to highlight stocks that exhibit notable relative strength as they are the ones that will lead the next leg up, whenever it comes.
You can easily follow any or all of the stocks in the ST50 on StockTwits by clicking here.
Have A Great Weekend!