April 18, 2012
On Wall Street, sentiment can – and does – swing just this quickly.
After a string of five down days sucked some of the air out of the market last week and resulted in the worst weekly loss of the year, the stock market rally got back on track Monday and Tuesday, with the Dow Jones Industrial Average gaining 2 percent before pulling back again today. Once again, shares of Apple (AAPL) led the way higher, soaring 5 percent Tuesday – after sinking more than four percent Monday – and helping propel the Nasdaq Composite Index above the 3,000 mark.
The reason for the swings? Well, nothing very complex. On balance, earnings are coming in better than expected, with several large companies – Goldman Sachs (GS), Johnson & Johnson (JNJ) and Coca-Cola (KO) – all beating analysts’ forecasts, while IBM (IBM) boosted its profit outlook for the year. Even longtime laggard Yahoo (YHOO) managed to deliver a positive earnings surprise after the closing bell. An extra benefit came from what seemed like a lull in the ongoing financial storm in Europe, as Spain managed to complete an auction of government debt successfully.
RELATED: How a European Recession Can Infect U.S. Markets
The bottom line, however, is that stocks rallied because investors were tired of selling – and they may be slumping today because investors felt the buying was overdone. Or as CNNMoney put it today, Wall Street “found new reasons to worry.”
That may seem overly simplistic, but this month’s rapid changes in sentiment and market direction all point to a lack of firmly held conviction that stocks are either over- or under-valued at current levels. The result is that companies delivering stronger earnings than analysts had expected – even if those results still fall below year-ago levels, and the pace of earnings growth has slowed – is enough to move the dial. Few of these moves have come amidst high volume. Indeed, yesterday only 3.4 billion shares traded on the New York Stock Exchange, about 10 percent below average daily trading volume so far this year.
The market isn’t just about Apple – although Apple’s advance has been a major contributor to index gains – and it isn’t just about earnings. It’s about investors’ willingness to believe that the U.S. economy will stabilize and improve, however slowly, and that the Eurozone crisis can be managed and contained. Give them an absence of events about which to worry, and a few tidbits of upbeat news, and the odds are that the market will rally.
Of course, the reverse is also true, and that’s why stocks still seem to be climbing the proverbial wall of worry. One of the reasons Apple has been a laggard is that its outsize gains have prompted profit taking; the same pattern is true for other securities, and for the market as a whole.
That all means the path ahead for stock prices is likely to be bumpy. Another batch of disappointing or confusing economic data, or a string of underwhelming earnings, and investors will be tempted to scurry for the sidelines once more, with just as much eagerness as they display in chasing stocks higher.