When Good Is Not Good Enough

07/26/2013 6:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Moneyshow's Jim Jubak suggests that investors should also watch how stocks react after reporting better-than-expected earnings as it may tell them where the stock is headed.

For the week ahead, what I’m doing is watching how stocks behave after companies report good earnings.  Now, you know, we all know about the idea that the stocks announce bad news and the stocks go up anyway, but one of the things that happen when you get near a top or a potential top, and after all we are near all-time highs in the US Market, is that you get stocks that report good news and yet they go down, and the reason really is people are looking at the saying oh, okay, so it was good news for the last quarter, what are they telling me for the quarter ahead, and is it really good enough to justify my continuing to hold the stock which is trading at an all-time high, or do I want to move to the sidelines, do I want to take profits? 

What I’m seeing right now is the possibility and the likelihood of about a profit taking.  It doesn’t take down the market a whole lot, but it does indeed lead to some kind of retreat, and a good example of this is what happened when Boeing announced its earnings on July 23.  The stock beat by 11 cents and initially on that news went up, but then I think it is almost like you can watch people’s psyches ticking through because they then realized that Boeing hadn’t raised guidance for the rest of 2013, and in fact, left it where it was, which is slightly below the Wall Street Analyst Consensus, so if you own this stock and it is trading at a 52-week high and you are going oh but they didn’t raise guidance, they didn’t give me any more fuel to drive the stock higher, so maybe what I want to do here is take some profits. 

What you get here is really two different kinds of thinking; you get people who have owned the stock for a while and are sitting on a 10, 20, 25%, 30% gain and they say okay, I don’t see enough good coming down the road, so I’m going to take my profits here and let it sit on the sidelines for a while.  You also then, and this adds to that, you get people who have bought into the rally relatively late.  They really didn’t like prices before, but they have been sort of forced by their own sense of I’m missing out to move in when prices are really high.  They are not comfortable where they bought, so now if there is any sign that the stock might be ready for a retreat, they are ready to sell the stock themselves on the head and say oh I did it to myself again, I bought at a high, but I’m going to get out before a tiny little loss turns into a big loss.  

Those two groups are enough to power about a profit taking. They are not enough to move the market really, really lower because they really don’t feed on very much; there is not a whole lot of these people.  You need the market to retreat far enough so that you get larger groups of people having remorse about what they bought or are needing to protect gains or you need some kind of macro setting that makes people really nervous.  So if we get about profit taking, the question will be what’s the setting in which that’s taking place?  Is it taking place in a setting where people then go oh, okay, so the stock has sold off by 3, 5, 7%; that makes it a buying opportunity because I like what I’m seeing down the road at this lower price or am I really sort of worried, and that is what we are going to have to look at as we move into August, September and October. 

The macro picture has enough potentially to worry people into turning a profit taking into a larger retreat, not necessarily, but you do have a political drumbeat of political news in the United States where people are talking about the coming clash between the President and Congress over the budget and the debt ceiling and the fact that these two sides are not going to be able to compromise at all and that would be September and October would be real difficulty. You’ve got worries about growth in China.  So there is enough macro stuff to maybe if it goes bad to turn this profit taking into something besides a 3 or 5% drop, but it really depends on the news after the profit taking happens and we are trying to figure out whether indeed we are going to get that first step, the profit taking, right now. 

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