Counter-intuitive to the post-Sandy sentiment, we started the week with a nice two-day bounce. It coincided with the beginning of a new month, which is a time when mutual funds allocate new money and with an important technical level for the market benchmarks – rising 100dma for $SPY and 200dma for the Nasdaq Composite.
Optimism was quickly cooled down Friday, which was another distribution day. Make no mistake, the market is still in a correction mode and one should still be very careful and nimble when establishing new positions.
The silver lining last week came from some of the best performing industry groups for the year – homebuilders, general building materials, infrastructure plays, and home improvement stores. Hurricane Sandy left a lot of damage behind it. A lot houses, roofs, furniture, cars will need to be repaired or replaced, so it was not a big surprise to see those stocks rally last week. I assume that these are the industries that are likely to outperform for the rest of the year.
For the shortened trading week, the St50 Momentum index lost 0.12% on average. The index might be flat, but under the surface there was significant volatility, most of it caused naturally by earnings reports.
$ELLI reported another set of excellent numbers, absolutely crushing Wall Street’s consensus estimates and yet, its stock tumbled. Negative market reaction to what appears to be positive news is never a good sign. Growth stocks often top before their earnings slow down. It is the natural order of the market cycle.
At the beginning stage of most momentum moves, price appreciation usually lags earnings growth as market is slow to react to new information. After a couple strong earnings quarters, market realizes that the stock might not be a one quarter wonder and there might be more to its story. This is the time, when market becomes proactive and starts to discount the best case scenario for the stock, which often sends it to irrationally high levels. Proactive discounting means that stocks move on sentiment, not on fundamentals, which sometimes means that prices will turn south before earnings growth slows down.
$AAPL broke below its 200dma for the first time in a while. I am sure that there are many value managers that are watching it carefully and looking to increase their positions, but at this point the stock lost its place on the St50. When and if it sets up again, it will likely reappear. It is always good to have conviction in your investment ideas, but discipline should always trump conviction.
$LNKD’s earnings report simply annihilated market’s expectations, but it still finished the week almost unchanged, which says a lot about the current state of risk appetite.
On a positive note, $AZPN beat Wall Street’s estimates for a fourth quarter in a row and finished the week near all-time highs.
$MGAM is hovering near multi-year highs and it seems is setting up for higher prices. It is still due to report earnings.
$INXN bounced from its rising 50dma on heavy volume and it looks higher from here.
$KORS continues to hold well above its rising 20 and 50dma and it keeps its N1 spot on the St50 list.
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Have A Great Weekend!