As spring turns into summer, the stock market has continued to trend higher. Small-cap indexes have consolidated from recent all-time highs while other major indexes, like the Nasdaq Composite and the S&P 500, are only now making new moves to all-time highs. While these new highs have been widely celebrated by the media, the rally has not featured the type of volume and breadth that I would associate with the beginning of a significant move up in the markets. In contrast to the indexes making new highs, we have seen a new trend develop relating to stock action following the quarterly release of corporate revenue and earnings. This quarter, numbers that meaningfully beat expectations resulted in stocks moving modestly higher while numbers that were in line with expectations reacted harshly and numbers that missed expectations, if only so slightly, were punished severely. This action suggests to me that stocks may be somewhat overpriced and may need a period of consolidation before moving higher.
From a technical perspective, it has been a long time since I have seen such a high number of stocks gap lower following earnings. A gap lower occurs when a stock closes at one price and reopens sharply lower the next day. Historically following such gap-downs, the stock is likely to be below that lower opening price a year later. Having said that, the majority of individual stock and sector patterns appear healthy, although are unlikely to produce outsized gains. Very little has changed as it pertains to sectors. Healthcare sectors remain in favor while those related to energy should be avoided. All things considered, we will cautiously use setbacks in the market to initiate or add to our long stock positions in the best sectors.
Disclaimer: Rocket Capital Management is a registered investment adviser. The comments presented do not constitute personal advice and are not intended to be a solicitation for the purchase of any individual securities or investment strategies. All investing involves risk. Please consult with a registered adviser before making any investment decisions.
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