Friends
The last four quarters remind me of the movie Groundhog Day, where the same scene plays itself out over and over again. In our case, the scene is earnings season. Share prices seem to rise before earnings are released, and then sell off for a day or two after the earnings are revealed. This pattern has been in place now for the last year. It has been clear that Corporate America is doing a very good job of managing their businesses, as companies continue to watch for a pickup in demand to signal that the economy is indeed turning the corner. In the meantime, the pattern of anticipation vs. the actual results continues.
What we always watch for is how stocks react to news. The pattern has been repeating itself now for several quarters. Buy stocks after the earnings season dip, and then sell them before the next earnings release. Teh reason an Apple or Caterpillar fall after what are seemingly sterling earnings releases is that investors already anticipated the good news and bought their shares ahead of them. After the news, there are more profit taking short-term traders involved and they overwhelm the lack of new buyers. After the profit takers exhaust themselves, the stocks begin to find new buyers, as prices become more appealing.
As for the market as a whole, the Dow is hovering around the pre-Lehman level, which would be a nice psychological barrier to break through. Although individual stocks trade off their earnings news, the market in general recovered from Tuesday’s dip rather nicely. The anticipation of the Fed providing quantitative easing (as we have discussed recently), and the continued pressure on the dollar has been the power behind the moe up in “risk” assets. As we saw on Tuesday, any move up in the dollar results in stocks, gold, oil and other commodities falling. we’ll keep an eye on the G-20 meetings this weekend to see how currencies react to any news or agreements that come from them. Countries sem to be in a battle to devalue their currencies faster than their trading partners, all for the benefit of their exporting corporations. As our dollar falls, companies in the US that derive a major part of their sales from overseas reap the benefits.
We have one more big week of earnings season, then the focus will turn squarely on the Fed (remember, all the money that they will be pumping into the system has to go somewhere – stocks perhaps?) and the upcoming elections. We’ll keep an eye on all of it and report to you our observations.
Have a nice weekend everyone.
