What I'm Watching This Morning Could Hold the Key

There's an interesting twist to the earnings dance this quarter.

 

It used to be when companies like Intel (INTC), J.P. Morgan (JPM), Alcoa (AA), and Goldman Sachs (GS) blew away their numbers, the stocks would gap higher and never look back. But something has changed...

 

The companies are beating their earnings estimates by a wide margin. And, yes, the stocks are gapping higher following the announcements. But the gains are wilting like lilac petals in the rain.

 

Consider the case of Alcoa, which reported a profit of $0.04 per share versus the expected $0.09 loss. AA ran 8% higher on the morning of the announcement but has since given back all the gains. Here's the chart...

 

 

 

Intel tells the same story. INTC gapped 4% higher in reaction to a spectacular earnings report. It didn't hold the gains, however. Yesterday, the stock closed at the same price it traded on the day before the earnings announcement.

 

Ditto for J.P. Morgan and for Goldman Sachs as well.

 

Is this reaction just modest profit-taking after vertical runs higher for the stocks? You know... the old "sell on the news" phenomenon? Or is it something more?

 

Could it be that the market has already discounted the stellar earnings numbers and is slowly coming to terms with lower growth in the coming quarters?

 

Apple's stock (AAPL) will give us the answer over the next few days.

 

AAPL jumped 7% higher in after-hours trading yesterday, following a terrific earnings report. Revenue and earnings beat expectations. Profit margins expanded. And the conference call was filled with one highlight after another.

 

Indeed, it's hard to imagine AAPL's business getting any better. The stock is likely to make an all-time high when it opens for trading this morning.

 

But that may not be such a good thing.

 

The last time AAPL was firing on all cylinders, and the last time the stock bumped up against $200 per share was in December 2007. Back then, it was hard to imagine AAPL's business getting much better, and the stock was trading at an all-time high.

 

AAPL shares lost 40% within the next two months.

 

I'm not suggesting history is going to repeat this time around. Indeed, AAPL very well could open higher today and then add to those gains as the week wears on.

 

Then again, it could follow in the steps of other illustrious blue-chip names and give all the gains back over the next few days. If that happens, it'll be an ominous sign for AAPL and another strong caution sign for the market in general.

 

Best regards and good trading,

 

Jeff Clark

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