An Earnings Stranglehold!

Earnings season is a game. Learn how to play the game and profit, ignore the game and risk losing big. This week is the height of earnings season as many of the big cap names report. Short-term traders control the market during earnings season, often running up a stock in advance of earnings, (especially stocks that are split candidates) then selling it off after the report is released. This "buy the rumor, sell the fact" mentality is a natural extension of a trader's desire to be the first to buy on good news. These days, buying on a positive report that was expected is a guarantee of being the last in, first out. Recent use of the "whisper number", has been decried by market pundits as ridicules. Companies not meeting the whisper number are often heavily sold. A closer look however, shows that many stocks post large gains in advance of earnings and need to sell after the report in order to reflect good, but not great numbers. Traders looking to profit (or at least avoid the downside risk) during earnings season should consult the earnings calendar before placing trades. Some of the biggest earnings runs are in stocks currently in favor with the momentum crowd (they change daily - that's a topic for another time) and as we mentioned, those companies viewed as split candidates.

As for trading today, the market action was mixed, as the Blue Chips lost ground while the tech stocks rallied with excellent earnings that continue to roll in.

The Dow Industrials sold off for a second day, losing 71 points to close at 11,489. The loss represented a 0.6% decline. Volume on the NYSE was moderately heavy at 840 million shares traded. Advancing stocks finished nearly even with decliners. Dow advancers included BA +2.62, C +1.25 and HWP +2.25. Decliners included AXP -2.62, HON -4.75, INTC -2.06, JPM -2.18, MSFT -8.31 and UTX -2.06. Technically speaking, the Dow closed at support on the 10-dma. That’s not surprising given the recent advance. Support below this level is at 11,400 while resistance is at 11,500.

A new record was reached for the Nasdaq composite. The tech stocks have firmly bounced back from the "almost correction" of January 6th. Enthusiastic buying is driving the market during the height of earnings season, despite the tumble by MSFT. The composite gained 20 points to close at the all-time high of 4,151. Volume was very heavy at 1.6 billion shares traded. Advancers led decliners 11 to 9. Wednesday's top performers among the big caps included: SDLI +42.75, OCLI +29.94, ITWO +25.25, YHOO +22.81, ETEK +20.25 and VERT +19.25. The day's losers include NSOL -34/81, SCMR -10.94, BRCM -10.44, NTAP -9.63, MSFT -8.31 and EMLX -7.63. Resistance for the composite is at 4,200, while 4,150 is now light support. Any real sell off in the Nasdaq will probably test the 4,100 level.

The broader markets closed higher Wednesday, with the S&P 500 posting a marginal gain (0.05%) on the day, while the Russell 2000 finished up 1.27%.

Advancing industry groups included: biotech stocks, Internets, pharmaceuticals, insurance, utilities and insurance. Weak groups included the banking stocks, software, autos and transports.

Bond yields provided some relief for equities today, closing at 6.716%. The bond market totally disregarded higher-than-expected housing starts of 7.1%. Traders focused instead on a report from a Washington consulting firm expecting only a 50-basis point increase in interest rates this year. The Fed was active today, releasing the Beige Book report, indicating strong economic growth with low inflation and wage pressures. Also announced was a policy change indicating that the Fed would terminate its use of the "Bias". The Fed will issue explanatory notes of its stance instead. The purpose of the change is to persuade the markets to focus on longer-term policies, rather than the next FOMC meeting.

It was primarily a day of earnings news that affected individual stocks:

A perfect example of the sell-the-news routine was today's trading in BRCM. The Company released earnings after the market Tuesday, posting earnings of $0.04 per share over estimates and announcing a 2:1 split. The market had already priced this in Tuesday, running the stock up 33 points. Wednesday, traders sold the stock heavily in early morning trading. Shares of the stock traded 10.44 points lower to close at $318.06. In spite of the selling, numerous analyst upgrades and reiterations were issued, placing price targets at $400 to $450 for the stock.

MSFT fell victim to the post-earnings depression Wednesday. As usual, the Company beat earnings expectations, this time substantially. MSFT posted earnings a nickel better than street estimates. Selling followed, blamed by some on numbers that fell short of the whisper number. The stock closed off 8.31 points at $107.

A stock that managed a mid-day turnaround was CTXS. The Company announced a widely expected 2 for 1 split before trading Wednesday. In addition, earnings were reported, beating the street by $0.01 per share. The stock was sold heavily in early morning trading, losing 8 points. This was not unexpected, as shares of the Company had gained over 30 points in a pre-announcement run. However, interest in the split overwhelmed sellers and the stock gained 2.44 points to close at $155.

After the market, LGTO released earnings $0.08 below expectations. The earnings shortfall was blamed on accounting practices requiring that certain revenues be reported during the year 2000, rather than during the 4th qtr of 1999. As a result, the stock tumbled during after-hours trading from $53.63 to trade at $30.00.

Earnings released after the close Wednesday included some big name stocks. Listed are the big cap stocks, as well as the number each beat expectations by: AOL +$0.10, AAPL +$.11, ASYT +$.11, CNXT +$.04, ITWO +$.03 (and a 2:1 split announcement), RBAK +$0.03, SYMC +$0.08, QLGC +$.04 (and a 2:1 split announcement), MUSE +$.01 (and a 2:1 split announcement) and finally, AMD-beating expectations by a healthy +$.49.

Widely held stocks scheduled to release earnings Thursday morning include the following: ADPT, DNA, GM, LSCC and S. After the close, ATML, EMLX, FLEX, INKT, INTM, KANA, LRCX, LU, MERQ, PMCS, SUNW, VRSN and VITR will report. Of these, DNA, LRCX, PMCS, VRSN and VITR are on our watch list for a possible split announcement.

Look for Thursday's action to again be controlled by earnings. Although the bond yield continues to climb, the equity markets, (make that the tech stocks) are likely to continue ignoring interest rates until earnings season begins to wind down. We now have one to two weeks of heavy reporting remaining, which should continue to provide fuel to the current optimistic feeling among traders. Despite the current rosy outlook, we still have storm clouds forming on the horizon. As February draws nearer, the bond yield and expectations regarding the FOMC meeting will begin to take center stage. As for economic news due out Thursday, we get the initial jobless claims and the trade balance reports. Neither is generally considered to be real market movers. As we have done often recently, we urge traders to check the earnings calendar before initiating trades. Remember - follow the rules and increase your chance for success!

Steve Pekarek
Research Analyst