Great Rally. What’s Next? – 07/12/2013

Stocks ended Thursday at 1675. That is the highest close in history… but just a notch short of the intraday high of 1687 set back two months ago.

After the recent strong rally, I sense that the broader market will go sideways to slightly higher for the next week or two. However, each individual stock will start to be weighed by the merits of their earnings announcements. And the bellwethers of each group will set the tone for their industry peers.

Even though, the market may go flat, there will be big winners and losers this earnings season. Those stocks that enjoyed big earnings surprises with their last quarterly report, then saw upward estimate revisions, are statistically biased towards repeating that feat in the next quarter.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Does an Apple a Day Keep Europe at Bay?

Stocks were pushed to their tipping point on Monday. On Tuesday they fought back a little with European bond rates modestly on the decline and a slew of strong corporate earnings reports.

The oddity on the day was that Apple shares were down another 2% making some think that the “smart money” knows that an earnings miss is on the way. Well the smart money was anything but smart following this false trend. After hours Apple supplied another tremendous earnings beat leaving little doubt of their excellence. Shares are exploding higher as are the S&P futures.

Beyond Apple this is a much better earnings season than last quarter. The best place to see this is in the estimate revisions ratio which now stands at 1.21. That means that 20% more companies are seeing positive estimate revisions than negative. And that makes it the best reading since August 2011.

Normally strong earnings news is all you would need to know to predict higher share prices. And if the US economy were an island unto itself, then the S&P would be at 1500 already. However, we are part of a global economy. Thus, growing concerns over European debt and what that means to the world economy continues to take precedence over the strong earnings reports in hand.

The best case scenario at this time is a trading range of 1370 to 1420 until the new debt concerns are packed away. I’d think we’d all be pleased as punch with that. Unfortunately I still sense we will head under that range before all is said and done.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Crazy Rotation Day

Monday was one of the crazier days in recent memory. At first glance it’s hard to see it with the S&P nearly breakeven on the day. Yet it becomes more apparent when you note the extreme difference between the Dow’s gain of +0.56% versus the Nasdaq’s hefty decline of -0.76%.

How the heck did this happen?

It’s called a rotation day. Some groups were in favor (retail and banks). And other groups (like tech) got slaughtered.

What should you do about it?

Nothing. You can’t chase a rotating market because you will never catch it. Kind of like a dog chasing its tail.

Instead you just stay put with your fundamentally sound stocks (strong estimate revisions and attractive valuations). This way when the rotation ends, and sanity is restored to the market, then these kinds of stocks will outperform.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research