I’ve discussed at length the unusual nature of the recent move higher in terms of earnings strength. When a company reports specific results the outcome has tended to be far different than one would expect in the midst of a rally.
So far during this earnings season the money to be made is on the short side. If a company reporting results misses expectations or provides weaker than expected guidance look out below. If a company manages to meet or beat expectations the upside boost is not nearly as impressive.
I saw several examples of this trend last week. Two big losers that reported weak results were True Religion (TRLG) and Blue Nile (NILE). Both were down more than 20% in the immediate aftermath of reporting results.
Were there any winners? Sure, but they were difficult to find and even then the gains were not as large as what was lost by those disappointing investors.
The headlines may be telling us that stocks are moving impressively higher. The story below the surface has to be a bit more troubling. While there is no doubt that economic activity in the U.S. is helping matters, valuations as they relate to earnings are reaching the extreme side of things.
What is fueling the move? One possible source of buying is clearly coming from the movement of dollars to exchange traded funds (ETF’s). The huge amount of in-flows in these more and more popular vehicles is making for a market that is less volatile and on a straight line higher.
Will it last? It can until the music stops.
What I continue to recommend is to focus on companies reporting results. There are plenty of stocks still to release earnings. Look to trade on the short side to find the next Blue Nile or True Religion.
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On the following pages are 5 companies reporting this week to consider: