Okay, NOW Earnings Matter
When is positive earnings news
bullish? When the market says positive earnings news is bullish, that’s when.
After selling positive news in individual stocks earlier this week, the
institutions swooped in Thursday to buy the good numbers.
As an intermediate-term momentum
trader, I need the market to reward positive earnings news by bidding up shares
of reporting companies on heavy volume. Otherwise, what’s the point in trading
high earnings-growth, high P/E ratio stocks?Â
I still need the market to fulfill two
requirements. First, I want to see a proliferation of high relative strength
stocks forming sound bases, rather than just a few. There’s safety in numbers.
Second, I want the market to put in an O’Neil follow-through day on one or more
of the major indexes.Â
In the meantime, the signs are
encouraging. The market Thursday paid up for companies with positive earnings, a
contrast with conditions described just two sessions ago in my Tuesday
commentary.
Microsoft
(
MSFT |
Quote |
Chart |
News |
PowerRating) gapped up and
ran 10 1/8 to 61 7/8 on nearly four times its usual trade. The software
juggernaut reported fiscal Q1 profits of 46 cents a share vs. analyst estimates
averaging 41 cents, according to First Call/Thomson Financial.
Nokia
(
NOK |
Quote |
Chart |
News |
PowerRating) gapped up and ran 8
1/8 to 38 1/8 on triple normal volume. The wireless phone maker said Q3 revenue
rose 50% to 7.6 billion euros ($6.4 billion) while net income increase 40% to
892 million euros ($752.2 million).
Texas Instruments
(
TXN |
Quote |
Chart |
News |
PowerRating) gapped up
8 7/8 to 45 3/4 on double average volume. The semiconductor maker reported
earnings of operating net of 33 cents vs. 26 cents a year ago and matching
estimates. The market ignored warnings of slower sales ahead.
Okay, the price action and volume in
these stocks bodes well for a tradable rally. However, the accumulation in
stocks like Microsoft, Nokia and Texas Instruments amounts to valuation bottom
fishing by the institutions. None of them qualify as high momentum trades. I
demand a stock have a 12-month relative strength of 90 or higher, trade above
its 50- and 200-day moving average and its mid level. I also insist on average
daily volume over the past 50 sessions of at least 300,000 shares and a share
price of at least $20.
All stocks, of course, are risky. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.