It all depends on the numbers on both the economic and corporate earnings front. If both are strong there is no reason for stocks not to continue their ascent.
The impressive 2012 run of consecutive weeks of gains for stocks was interrupted last week. The major indexes were slightly lower thanks to a drop on Friday. That move lower was triggered by continued uncertainty in Greece.
I’m not sure that is the real reason for the drop. The fact is we have come far from the morass that was the second half of 2011. Fear has been replaced by hope. More importantly the U.S. economy is performing well. The absence of a so-called double dip recession has lit a fire in stocks.
Interestingly we may be looking at a mirage with respect to stocks. At least from a trading perspective there has been a significant decline in volatility. Could it be that complacency is setting in?
More troubling is something I have harped on here over the last few weeks. When companies are reporting earnings we are not seeing significant huge gains to the upside on strong reports. It is only the small minority of names that are seeing what can be termed pops in stock price.
Instead the bias from an earnings perspective continues to be to the downside. The risks there are substantial. Last week designer jean company, True Religion (NASDAQ: TRLB) reported results that disappointed including guidance that was weak. Shares plunged more than 27% on Friday after the news.
You won’t find a 27% gainer triggered by a positive report. At best you might find a 5% move higher. Simple math says that if you short 4 stocks and miss on 3, but hit one big loser like True Religion you will be a winner.
That’s how I would trade earnings this coming week.
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