From Macro to Micro, Finally!

• Posted by Derek
• on October 12th, 2011

“Price is a fact; earnings get restated.”  Ralph Acampora 

Earnings season is upon us, and with it a great opportunity to evaluate market structure.  The insanity of gaming Washington DC, not to mention Greece and Slovakia, is about to take a backseat to what really drives $SPX…great companies.  Call it what you want, but a cap-weighted index is nothing other than a mega momentum index.  Its outcome is not driven by the mom and pop down the street, but by the performance of megacaps like $XOM & $AAPL.  As a price-weighted index, $IBM has nearly 20X the impact of $AA in $DIA…forget about that dog and focus on whether the leader leads.

I’ve personally found this market so hard to tackle, with every move away from the magnet looking legit in real-time, punctuated by the “break” of the lows early last week.  I hate that I was slow to act on the from failed moves come fast moves potential built into that setup.  Not important at this point, what matters is how each test is handled in the present.  To this point, the bulls have passed every test.  Despite our obsession with the Euro outcome, company news is about to take the stage led by our country’s greatest salesmen.  They will take every opportunity to blame DC & Europe for hesitant customers; what matters to the speculator is “How is the news absorbed?”

I have found this macro ride more stressful than pleasant, and look forward to this quarterly stretch where correlation between stocks falls.  For 10 weeks, companies have been lumped together with little ability to convince anyone they know how to handle a rapidly changing economic environment.  In the next 4 weeks, some leaders will step forward with results and plans, and some won’t…I expect massive separation as fund managers dump losers to chase winners.  $NFLX was a rare case of a stock whose sponsorship changed away from the earnings result, but as Leigh Drogen pointed out its round trip is a great example of how long it takes for institutions to get in and out of individual stocks.

Markets don’t just run without at least pausing to regroup, and with 95% of stocks above barely sloping 10 Day averages this would be a great time for some “bad” news from Europe to reset stocks to a balance area before the next big move.  I’ve expanded my “Trendiness” graphic from its usual 2-3 week look just for perspective, take a look:

The move on October 5 was an incredible display of expanding breadth, as at 50% above it surpassed the breadth achieved on September 27 despite $SPX being 35 points lower.  And the upside was there for the open-minded observer to see, as the September 20 reading near 50% was achieved with $SPX above 1200!  No such standouts as I see it now, just the following 2 observations:

1) Market breadth is considered loose and erratic when a 95%+ reading occurs within days of a 15% reading

2) There are no secret stones to be turned now that 95% of stocks have moved above this short-term average

I think we can now worry less about macro calendars and use those events to get positioned with the unfolding micro moves.  No need to bet ahead of the events, as post-earnings drift offers both a chance to assess the earnings outcomes and buy options cheaper than they were entering the release.  I trust Joe at Option Radar as much as anyone in gathering the info, take a look at his early calendar to see which earnings are on the way.  Earnings estimates are the pointspread of stock analysis; markets may not be perfectly efficient but they’re smart enough to not let you cheaply place a “just win” bet on the Packers or LSU.  Remember the tagline on Ivanhoff’s site to stay away from CEO stories…the reaction is more important than the news itself.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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