Bank Earnings Disappoint, Markets React

Earnings were mixed on the day and without running through the list below I cover the sector that experienced the good and bad. The challenge from my view with the earnings cycle for the fourth quarter is growth in revenue and earnings. If we compare quarter over quarter the number is more favorable that fourth quarter versus third. Remember statistics are used to make it all sound good, but from view the top line revenue growth has been slowing and with the current economic picture that is not likely to change in the fourth quarter data. Looking forward isn’t that great either. However, we all knew that and the focus seems to be on beating estimates or missing. In the case of Best Buy we see what happens when you miss and in the case of Bank of America you see what happens when you beat estimates. I am not a fan of trading earnings, but I am a fan of owning stocks that are in solid uptrends and managing the risk of earnings.

The broad market indexes moved lower with the Dow leading the downside thanks to United Healthcare and WalMart. On the upside Alcoa and Hewlett Packard led the way.  The Dow was off 0.4%, S&P 500 index down 0.15%, Russell 2000 index up 0.12% and the NASDAQ was up 0.07% or 3 points. Couldn’t gain any traction as Best Buy (down 28.6%), Goldman Sachs (down 1.8%) and Citigroup (down 4.3%) controlled the sentiment on the trading day. The fun continues after hours with American Express and Intel trading lower on earning reports. Tomorrow ends the trading week with more financials (STI, BK, FHN, MS and GE) reporting prior to the open. Should be good times — the futures are pointing lower tonight, and the AM results could add to that if the news is not better.

Actionable items of interest today…

Financials (XLF) were hit by banks on the downside today following yesterday’s positive news from Bank of America. Citigroup missed earnings and revenue was light as well. The mortgage business took most of the blame and the stock fell 4.3% on the day, break support at $53.25 as well and short term casting a negative shadow over the stock. It is still worth watching to see how investors react now and looking forward. Goldman Sachs beat earnings estimates, missed on revenue and grew return on equity well ahead of third quarter. The banks fell 0.65%, regional banks fell 0.87% and financials fell 0.6%. Not devastating, but damaging for the day. Watch to see how this unfolds short term.

Interest rates fell again with the ten year bond dropping to 2.84% today. IEF gained 0.3% on the day and remains in a positive bounce off the lows in December. Money continues to find its way to bonds short term and we have to watch how this unfolds… trend or just short term fear? The answer will determine direction short term.

China sold again today, down 0.95%. The consolidation near the current lows remains on my watch list. We discussed a trade to the upside and posted to the watch list, but the downside has just as much of an opportunity to maintain control over the direction. We continue to look at how this plays out and what opportunities will arise from the shuffling of the house of cards.

Retail as a sector continues to struggle as Best Buy adds to the worries and woes of the sector. The stock fell more than 28% on missed earnings and revenue for the fourth quarter. Sales were lower than expected and the stock was punished for the miss. XRT fell to $83.30 support level we discussed on the news. This is the level we discussed holding above short term, but the downside pressure is on, and the short interest is rising. Not a fan of the stocks short term and I would exercise extreme caution.

Healthcare returned to the upside as each of the sub-sectors continue to move higher. Hold, manage your stops and see who this plays out going forward.

Technology held it’s own as the sector was under pressure from semiconductors selling and talk by analyst of valuations. After hours Intel didn’t help with a disappointing outlook for revenue and earnings growth. INTC was down 2.8% after-hours tonight. Watch to see how it impacts the sector tomorrow. XLK was flat today and Semiconductors (SOXX) down 0.5%. Proceed with caution and let the reactions settle to start the trading day.

VIX index move up 2% on the day back to 12.5. Not much of a move, but it shows that the bottom has been established short term and the next move is going to depend on investor sentiment relative to the earning parade.

Bottom line… the market wants to move higher, but I am not convinced investors have made up their mind relative to the economy and earnings. Both are driving the daily activity and that has created the uncertainty. The key is to remain patient and pick your direction as this all unfolds. We are still heading sideways as all this moves forward. Wednesday produced an upward bias, but Thursday kept it in check. One day at a time is all we can do. Watch, listen and act according to the discipline you deploy relative to the markets looking forward.