Watch Those Big Gaps Down as We Stair-Step Up
Have you noticed lately what's happening with earnings reactions? Let's try to explain what's going on by looking at six notable examples. And maybe it explains current sentiment.
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The S&P 500 was up again on Thursday. It has stair-stepped to the upside for a week now after going sideways the week prior.
Two weeks ago as earnings season began I noted that I like to look at how stocks react to earnings. At the time I praised Delta Air Lines DAL for enjoying a gap up and holding on to it. But look at it now, the S&P has crept up all week and this stock that gapped up has leaked and now appears as if it wants to fill that gap.
But then there is a stock like Texas Instruments TXN. They didn’t have great earnings but that little sideways move from a new all-time high gave no warning. The stock should find some support at that line, but that’s not great action.
IBM IBM also didn’t build a big top but it, too, got clocked on earnings. It’s into support now but that’s a quick 10% whack, giving up all that it gained in the month of June.
Quite frankly, Dow Inc. DOW shocked me because lately these down and outers have been doing well. But look at that gap down: 17%! Oh sure, it’s back to the April low, but it barely went anywhere off it.
Chipotle CMG is no longer the hot stock it once was, but that’s down 20% from the time we turned the calendar to July and it’s right back at the April low.
Then there is Netflix NFLX, which had a decent quarter. There are no gaps down here but the stock is down over 10% this month and is back to where it was in May.
I am sure there are plenty of stocks that have gapped up and held the gaps up better than Delta but when I read that the beat rate on earnings is over 80% and I see so many stocks gap down —big gaps— I am of the mind that the beat was either too easy or the stock was priced for a better beat.
And the entire time the S&P has crept upward. The entire time we’ve had meme stocks go wild. The entire time we’ve seen breadth good, but not good enough to turn the McClellan Summation Index back upward. The entire time we’ve not seen the number of stocks making new highs increase over that July 3 reading.
Maybe that’s why sentiment isn’t as giddy as it was three weeks ago. Maybe that’s why sentiment is more complacent than giddy. No one thinks the market can come down. Meanwhile, individual stocks are gapping down like I can’t recall seeing in a while.
We’ll see what next week brings since often if the market is down heading into the big tech earnings they "surprise" to the upside. But the market hasn’t been down, has it? Not yet.
