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Tuesday, July 20, 2004
Market Recap
The long over due rally from oversold levels finally showed up today, with the major indices closing at their respective highs of the day. This bounce was over due and it was not surprise to see. The overall market is still not out of the woods yet. A one day rally will not repair the charts of the Dow and NASDAQ. They are both still below their 200 SMAs, but the S&P did manage to close the day above its 200 SMA. That is a small light at the end of the tunnel.
News After the Bell
A round of good news came out after the bell, including MSFT announcing a share buy back plan, a quarterly dividend, and a one time special dividend of $3.00. They have finally decided to do something with the $60 billion in cash they have laying around in the back room. A slew of good earnings reports were also released, sending stocks up in after hours. Our new short positions we took today are not doing well in after hours. LLTC and WEBX are both up over $3.00 in after hours. We gambled and took these positions in front of earnings and got burned doing so. The strategy was that stocks have been selling off lately on good earnings so why not take a chance and participate in the gap downs. Instead, these stocks went up on us instead and they now are primed to gap up. Lesson: It does not pay to trade in front of earnings. There is no skill to it, it just gambling.
We were shorting into the strength on these stocks, trying to get in at resistance levels. It looked like this rally was just a few shorts covering to lock in some profits, but I wonder if news leaked today ahead of these earnings. I think there were some institutions that knew what earnings would be before hand and orchestrated controlled buying. This is big business, it is corrupt, and they have their sources.
I love the stock market but it is set up to swindle the small investor. You have to be good to beat it. Being good means not gambling on earnings. If you are good, you do not need to gamble. We all make mistakes and I made mine today trying to play earnings; it is just not worth it folks. All this good news keeps coming out but the ANALysts have a different picture than we are getting from the companies. (Recall the commentary from last night on this subject.)
Is Today's Rally for Real?
Do not be fooled by the rally today. The markets are essentially set up for failure at this point. We are either headed straight into a bear market, or the analysts are pulling off one of the biggest heists Wall Street has seen. It does not seem to matter what a company reports or guides anymore.
3M is all the evidence you need to see what is going on. They reported earnings yesterday and beat estimates by a penny. A 25% gain in earnings this quarter and nearly a 10% gain in revenues. They even guided higher for the remainder of the year, yet the stock sells off over 5% yesterday. I read a report on 3M's earnings, in which they were called a “disappointment”. The company beat estimates, raised guidance, and gave a rather rosy outlook for the rest of the year, and that is a disappointment? Hmmm...
Oil is still a concern, but I have heard fewer complaints about the high cost of gasoline in recent weeks so the concern must really be muted. Security is always a hot issue; there have been more car bombs going off recently than there were fireworks on the 4th of July. However, if you look at the security stock sector, you would never know that security is still a very high concern. Security stock charts look pitiful at a time when they should be breaking out due to the recent terrorist related news. You would think these stocks would be running up in front of the Olympic Games.
With all of these seemingly over inflated expectations, it is hard to say that we are not heading into a trap of some sort. When companies can guide higher and produce results to prove they can meet those estimates, stocks normally go up. A 25% increase in earnings should have been good for at least a 5% gain in 3M, not a 5% decline.
The markets and many individual sectors are down and are ready to test support. The way the charts look and the fact that all indices are below their respective 200 SMAs, I am surprised that we have not had a negative event, bad news or something unforeseen that would take this market over the brink.
When expectations are above and beyond the great results that are being published from some big name tech stocks, it is baffling to see this market decline. Sell the news? I guess so. What else are we to think when the economy is moving along…or is it? Businesses are proving that earnings have been pretty good this past quarter. Yet we continue to see stocks getting beaten up.
If stocks can not move up on good news, then all the signs are there for a return of a bear market. With all the negativity following solid earnings news, it would seem that something slightly negative would really slam a stock.
Here is another example where the markets are not reacting as we would expect. Intel (INTC) actually traded higher yesterday despite releasing news that their newest notebook chip will not be ready to ship until 2005. Originally it was planned for the 4th quarter of 2004. Okay, figure that one out. News that should have made Intel sell off yesterday but it actually gained on the day.
The market is just not reacting as most would expect - no matter what the news. It is unpredictable, and it is about the toughest market I have ever had to trade in. The good news is that if you are shrewd enough to survive this tough market, imagine how much better you will be at trading and how easy it will be to profit when the market turns in our favor. Times will get better friends and when it does, we should have many years with results like we had in 2003.
OTC BB Watch List
- MOBL (up over 50% since mentioned here a couple of days ago)
- GSPM
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