Stocks react positively to mixed quarterly earnings

Commenting on today’s trading focusing on corporate quarterly earnings, Gorilla Trades strategist Ken Berman said: 

quarterly earnings

mohamed_hassan / Pixabay

Although we still didn’t see new all-time highs in the major indices on Friday, stocks seemed to react to all positive news bits, while shrugging off the weaker quarterly earnings and the bearish economic numbers. In a weak market, Amazon’s (AMZN) dismal report would have been enough to cause, at least, a sizable one-day pullback in stocks, but bulls almost pushed the stock back to unchanged on Friday and the rest of the market remained very strong in the face of the mixed headlines.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2019 hedge fund letters, conferences and more

The major indices all finished with modest gains on Friday, with the S&P 500 and the Nasdaq getting very close to their all-time despite the mixed quarterly earnings, as traders celebrated the upbeat trade-related reports. The Dow gained 151 or 0.6%, to 26,957, the Nasdaq was up 57, or 0.7%, to 8,243, while the S&P 500 rose by 12, or 0.4%, to 3,023. Advancing issues outnumbered decliners by an almost 2-to-1 ratio on the NYSE, where volume was slightly above average.

Quarterly earnings in focus for tech giants

Politics and corporate earnings had the biggest impact on financial markets this week, and while global risk assets continued to rally, U.S. stocks drifted sideways in choppy trading until Friday. The earnings picture was mixed compared to last week’s clearly bullish landscape, with especially Amazon’s (AMZN) and 3M’s (MMM) weak numbers causing concerns regarding the state of the global economy. That said, there were plenty of positive surprises as well, with Microsoft (MSFT), Intel (INTC), Tesla (TSLA), Visa (V) and Procter & Gamble (PG) all posting encouraging results. Although the Brexit saga still hasn’t reached its conclusion, the risk of a hard Brexit diminished, boosting investor sentiment globally, similarly to the ceasefire in Syria.

We had a relatively quiet week in terms of economic releases, but the few key reports leaned bearish again. Despite the weak numbers, Treasury yields were virtually unchanged for the second week in a row, but the yield curve continues to predict a rate cut by the Fed for next week. Both core and headline durable goods orders missed the consensus estimates, but the Markit manufacturing PMI and the Richmond Manufacturing Index came in above forecast, giving hope to bulls that the soft patch in manufacturing will be short-lived. After several weeks of positive releases, the housing market sent negative signals this week, with the Housing Price Index, new home sales, and existing home sales all missing expectations. 

Technicals

The technical picture is still positive across the board, despite the two choppy and directionless weeks in a row, and the major indices remain in advancing short-and long-term trends. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also closed above their now rising 50-day moving averages on Friday, even the relatively weak industrial average. Small-caps continue to support the bullish case, and the Russell 2000 hit a new one-month high on Monday, so the index could get closer to its all-time high in the coming weeks, being above both its moving averages. The Volatility Index (VIX) remains below the 15 level, closing the week near 12.5 ahead of the crucial Fed decision, and that’s another confirmation of the underlying bullish trend in stocks.

Market internals improved again thanks to small-caps, and while some of the most reliable measures are still weaker than before last year’s deep correction, the healing process continues. The Advance/Decline line hit new bull market highs this week as well, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased again on both exchanges, rising to 105 on the NYSE and 60 on the Nasdaq. The number of new lows ticked lower in the meantime, dropping to 24 on the NYSE and 50 on the Nasdaq. The percentage of stocks above the 200-day moving average continued to increase in the choppy environment, and the measure hit 58% on Friday.

Quarterly earnings not only highlight as Fed and shorts in the news

Short interest continued to plunge in the first half of the week, and although the decline slowed down, later on, the most-shorted issues still performed much better than the average thanks to positive sentiment. Our previous pick, Revlon (REV) broke out from its bullish consolidation pattern this week, hitting a new eight-month high, and as the stock still has a short interest of 54%, bears could be in for more pain. Tanger Factory Outlet (SKT) popped up on the list of the stocks with the highest short interests, with a reading of 49%, and after two wildly bullish weeks, the stocks could continue its recovery. Snap-on also hit a multi-month high this week, and as the stock has a very high days-to-cover (DTC) ratio of 16, it might be ready to reach its all-time high from last year in the coming months.

After this week’s relative lull, next week will be packed with crucial economic releases, not to mention the Federal Reserve’s expected rate cut. The CB consumer confidence number will be out on Tuesday, the ADP payrolls number, while the advance GDP print, and the Fed’s announcement will highlight Wednesday’s session. The Core PCE Price Index, the Chicago PMI, and personal spending will be out on Thursday, while the week will end with a bang, with the government jobs reports and the ISM manufacturing PMI both coming out on Friday. The earnings season will also be in full gear, and Apple (AAPL), Google parent Alphabet (GOOG), Facebook (FB), Exxon (XOM), and Mastercard (MA) could all have a huge impact on stocks, so investors should fasten their seatbelts. Stay tuned!



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver