Author: Ivanhoff

Reaction to News Is More Important Than the News Itself

All charts in this post are powered by MarketSmith

Netflix reported a 467% earnings growth a couple weeks ago and it still sold off.

Amazon announced a 999% earnings growth and 39% sales growth. Its numbers were double the average analyst’s estimates and it still sold off.

Shopify just beat the estimates by 170%. They reported earnings per share of 2 cents while analysts expected a loss of 3 cents per share. SHOP gapped down and it is currently trading more than 20% below its all-time highs.

Reaction to earnings is a lot more relevant than the earnings themselves. A triple-digit growth or triple-digit earnings surprise is not essential if the market has already discounted it. What matters more from a practical point of view is the market reaction. If a company reports earnings and its stock gaps up to new 52-week highs and closes near the highs of its daily range, then the market was truly surprised and this stock probably has more upside ahead.

In its struggle to be forward-looking, the market can often act counter-intuitively to many. Short-term tops are often formed when a stock sells off on what appears to be great news on the surface. Short-term bottoms are often created when a stock rallies on bad news.

Momentum Monday – FANG Under Pressure and The Future of Fintech

All stock charts on Momentum Monday are powered by MarketSmith

There’s no better indicator of market sentiment than the price action in momentum stocks. Tech momentum stocks have been obliterated in the past couple of days. This is nothing new. What’s more important is if they are able to muster a bounce again.

The recent market reaction to tech stocks’ earnings reports can be a concern for bulls. It’s not normal to see 20% one-day drops in large-cap tech leaders like Facebook and Twitter. In a strong bull market, bad news tends to be quickly forgiven. Add to that the lack of enthusiasm about Amazon’s and Google’s huge numbers, and you have plenty of reason to hedge or decrease long market exposure.

Dip buying has been working flawlessly for most of 2018, which explains why the current market is a little bit complacent. While many momentum stocks are getting murdered, the VIX is barely up. VIX tends to rally when the demand for SPY’s put options for protection or speculation skyrockets.

Another Strong Quarter for Servicenow

All stock charts in this post are powered by MarketSmith and I am an IBD Partner.

Who says that you cannot make money in IPOs anymore because nowadays most companies go public very late in their growth cycle? Servicenow (NOW) made its debut as a publicly traded company in 2011 and since then its stock is up almost 1000% and reached a market cap of $34 Billion.

No mid-cap stock can go up 10X in six years if it relies only on a good story and expectations of future growth. Serivcenow has the growth to back up its price appreciation. In 2011, it made 4 cents per share. In 2018, it is expected to make $2.40 per share.

NOW reported another impressive quarter today. Its Q/Q earnings growth accelerated to 123% compared to 81% and 46% in the previous two quarters.

Keep in mind that the growth number is irrelevant if it doesn’t exceed market expectations. Look at NFLX which reported 467% earnings growth and it is still trading 20% below its all-time highs.

If the market is in a good mood, even a small surprise can lead to new 52-week highs and a sustained uptrend because happy people are willing to pay happy prices. A more cautious market needs a much bigger surprise to launch a new powerful trend.

NOW surprised by only 13%, which explains the lack of enthusiasm in the market about their huge growth numbers. Even its volume today was not that impressive. Typically, big new trends are started by breakouts on at least 3X the average daily volume.

Either way, I am bullish on NOW. A move above 195 might rekindle its momentum and lead to a quick spike – first to 200 and then to 220.