Börsipäev 12. juuli

12.07.2005 16:07

Rev Shark:

Stay Alert During Earnings Season
7/12/05 8:38 AM ET

The most dangerous moment comes with victory. -- Napoleon Bonaparte

The action since the gap down on Thursday morning following the news of the bombings in London has been picture perfect for the bulls. Breadth has been overwhelmingly positive, semiconductors and biotechnology stocks have been leading, crude oil has pulled back from its highs and the technical patterns in the major indices are very positive.

The bulls are in control and victory looks certain, which is exactly why we can't afford to let our guard down. The one great certainty in the market is that today's victors are tomorrow's losers. The cycle never changes, but what makes it so difficult for investors is that timing the turns is no easy task. What seems like a logical turning point to us is seldom respected by the market.

One particularly perverse aspect of the market is that the better things look, and the more confident investors are, the more dangerous the market becomes. When everyone is bullish and the market looks like it is going straight up, investors use up their buying power and the danger of a reversal grows. On the other hand, when momentum is strong, the upside moves can be much stronger and faster than seems possible. Trying to time the point when things have gone too far is fraught with peril.

One helpful approach to this dilemma is to look for major events that may serve as a catalyst for a change in market direction. Long-side investors like to sell for a reason, not simply because they have made some nice profits recently. They want to base their decisions on something concrete, such as an employment report, interest-rate decisions or a change in the direction of the dollar.

I feel quite strongly that earnings season will serve as the catalyst for a top in the market. Earnings may be fine, but they will present an ideal opportunity to take some profits. This has little to do with how good earnings might be and much more to do with the emotional and psychological mindset of investors. I suspect that with the rally going on three months now, there will be investors looking for a good reason to raise cash and take a summer vacation. Earnings season serves as the perfect catalyst for such things.

Keep a close eye on the earnings calendar and think very hard about whether you want to continue to hold a stock into its report. Genentech (DNA:NYSE), which reported a very good quarter last night and has some upgrades and positive analyst comments this morning, will be a particularly good stock to watch for a 'sell the news' reaction. It is trading up about $1 so far, but it has been strong for a while and there are lots of holders with good profits. If that turns negative today, it will give us a clue as to what investors will be looking to do as the earnings season unfolds.

We have a flat open. The dollar is weak, crude oil is up and overseas markets are mixed.

No positions in stocks mentioned

Gary B. Smith: