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THIS EARNINGS SEASON IS quite similar to the previous one from a technical analyst's point of view. Earnings themselves seem to be getting better and many companies reported nice upside surprises. But as was the case in April, the market is shrugging off good news and punishing bad news.
This is the sort of unquantifiable data that reveals the presence of the bear.
When the market reacts poorly to earnings we can surmise that expectations were too high. Investors buy in advance of earnings reports but sell when those earnings do not exceed their own often misguided expectations. Buy the rumor, sell the news.
This is the information that does not show up in traditional sentiment gauges such as the Chicago Board Options Exchange volatility index (the VIX) and various opinion-based polls and surveys such as Market Vane.
If we were to only look at these indicators, we would see a mixed bag rather than group-think on one side or the other. Only extremes of bullish or bearish behavior and thought give us any useful information to help us assess the market's mood.
Following the market's reactions to individual earnings stories can yield great clues to what is happening beneath the surface. We cannot see this by just following major stock-market indexes, such as the Standard & Poor's 500.
With some notable exceptions, reactions to earnings reports have been poor.
For example, major appliance maker Whirlpool (ticker: WHR) reported before the bell Tuesday that its revenue and profit beat expectations. Further, it lifted its outlook for the year, but the stock fell nearly 3% that day and more than 2% more Wednesday. Good fundamental news was apparently baked into the price already and was not enough to keep the bulls interested
There are exceptions, of course, as such stocks as Wells Fargo (WFC) jumped on its good results. However, it does seem that these examples are few and far between. And even those that do well seem to have other stories. Goldman Sachs (GS) jumped on earnings but the settling of a major government lawsuit is still fresh on investors' minds.
Federal Reserve chief Ben Bernanke will have a good deal of influence on the stock market as he began his two-day testimony before Congress Wednesday. Chart watchers will not ponder his words as others may do but will watch for the market's reactions, which were not very good Wednesday afternoon.
Given the heady expectations investors have ahead of individual earnings reports, I can only believe that expectations for continued economic recovery are high. To meet those expectations, the chairman would have to be quite upbeat in his remarks throughout the entire testimony. The market will tell us quickly that he was not.
On the charts, the S&P 500 failed last week at its 50-day moving average (see Chart 1). The ensuing decline July 16 was broad and deep, but we cannot declare total victory yet for the bears. The Tuesday rebound, though weak, took the index back to the vicinity of the average to keep just enough evidence on the charts to support a glimmer of bullish hope.
Chart 1
Hope is fleeting. With technical events such as moving average failures and rather strong evidence of excessively bullish expectations, it is difficult to imagine a sustainable advance is in the cards.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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