We’re starting to see stocks drop after companies report good earnings.
That’s not surprising. In fact it’s over due after a rally like this one. The Standard & Poor’s 500 index was up 13% since August 26 as of October 25.
Inevitably after stocks have climbed so far so fast, some investors decide to take profits. Others in the momentum camp decide to sell on the good news. Sure, Cummins (CMI) grew earnings by 140% in the third quarter, it announced on October 25, but to a momentum investor that can mark the time to sell if, as seems likely, the company won’t beat that next quarter.
But it’s easy to over-interpret these kinds of stock specific dips and turn them into some kind of trend. So on October 26—besides a chance to react to the after-hours Cummins earnings report from the day before—the market got a dose of a stronger dollar—which takes a toll on the price of commodity and materials stocks—and some weakness in Europe that stemmed from disappointment that the Swedish central bank said it was thinking calling a halt to the recent rounds of interest rate hikes.
So connect all those dots and we’ve got a correction, no?
The indexes hardly budged on October 26.
The S&P 500 was down all of 0.24 points and the Dow Industrial Average was up 8 points. That’s 8 points. Not 8%.
The market can easily feel worse than it is because a few stocks that have led the market, including some high profile sector leaders such as Texas Instruments (TXN) drop on good news.
This kind of sell on the news weakness could, of course, grow into a correction but for that to happen we’re going to need something more substantial than a few instances of selling by momentum investors.
Like a big disappointment on Friday from the third quarter GDP numbers or next week from the Federal Reserve on the “when” and the “how much” of quantitative easing