Rolling Stocks Report September 6, 2017

 

More money came into the market last week than any other time this year and, while there were buyers across all groups, most of the money went into the Earnings Momentum stocks.

Featured Stocks

NQ Mobile Inc. is a global provider of mobile Internet services. The Company provides a portfolio of offerings, including mobile game publishing platforms, mobile advertising platforms, mobile entertainment applications and platforms, mobile security and productivity applications, as well as other mobile applications. It operates through two segments: consumer and enterprise. The consumer segment primarily consists of mobile value added services, which includes mobile security services, mobile games and live mobile social video platform, advertising services and other services

Most recently the Sept 2017 $3.5 calls have been very active.

There hasn’t been much follow through to stock trades in either direction over the past quarter as the S&P 500 has basically been flat-lined. One issue has been how stocks have reacted to earnings.  The stocks of S&P 500 companies that beat sales and earnings estimates saw no benefit for their strong results. Such a lack of a reaction has really happened one other time over the past 20 years – at the very top of the dot.com bubble. Just as much of a concern though is the lack of a post-earnings announcement drift (PEAD), or the Surprise Alpha – the amount the stocks outperform during the two days following a positive earnings surprise. Really, 2017 has been one of the worst years for seeing following through after an earnings beat and, more recently, the performance has been the worst since the market’s selloff in the summer of 2011.  Potentially, the good news about this phenomenon is weakness one quarter tends to lead to strength during the subsequent quarter.

To illustrate where the money has been going over the past 90 days based on our Earnings Expectations Life Cycle. Stocks of companies in the Positive phase and Earnings Momentum phase of the life cycle have been getting bought and those on the Negative phase and Value Traps phase have had money come out – thus while the market has been moving sideways, money has come out of the stocks with weaker earnings and gone into those with stronger earnings. Most of the strength came earlier in the quarter and if we had shown the same information from the middle of July until the middle of August, all phases were much weaker, until last week when buyers stepped in across the board. Stocks of companies with Earnings Momentum led the way, but both positive and negative earnings companies saw solid buying.

The amount of money supporting stocks did not quite make it to its earlier highs set back in March or even earlier this summer in July, so we haven’t gotten a buy signal just yet, but the strong buying during the week is often a sign of either the final capitulation of buying before the selling begins or the start of a bigger move higher, and most indications lean towards a move higher. However, we can’t ignore that there are warning signs, such as the lack of a reward for the positive earnings stocks, which is why we are keeping the 2,450 line in the sand and will focus primarily on the long side around earnings as the S&P 500 remains above this level.

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