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Sector Detector: Strong Earnings Balances Global Worries

 May 03, 2012 05:39 AM

(By Scott Martindale) Have you noticed that there hasn't been much new to say about the stock market and its drivers lately? Bears are weary from calling tops that don't follow through, and bulls are hesitant to inject more cash until they have a more inspiring catalyst. So, we're pretty much left to wonder whether the overworked mantra "Sell in May and go away" will be a self-fulfilling prophecy…or a contrarian catalyst for the bulls to get busy again.

The Dow, Nasdaq, and S&P 500 are all holding above round-number support levels at 13,000, 3,000, and 1400, respectively. On Tuesday, the Dow hit its highest levels since December 2007, following a strong ISM Manufacturing Index and strength in China's manufacturing sector, but it petered out before the day's end. Riskier small caps actually finished in the red as investors were worried about maintaining the "risk-on" trade. Then Wednesday's ADP disappointed, but the riskier Nasdaq, mid caps, and small caps were the leaders while large caps languished. Financial and Energy led on Tuesday, but lagged badly on Wednesday.

[Related -Netflix, Inc. (NFLX) Q4 Earnings Preview: What To Watch?]

Yes, there's a lot of confusion during this period of technical consolidation, so investors are grasping for any sort of sign, omen, or directional catalyst. Now they await Friday's Government Employment Situation report. Bulls are hoping for a green light to renew the surge…or at least a reason to continue holding the line until the next catalyst.

Speaking of holding the line, the SPY is still getting reliable support at the convergence of its 50-day simple moving average and the uptrend line shown on the chart. SPY closed Wednesday at 140.33. RSI, MACD, and Slow Stochastic are showing higher lows and bullish divergences.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

If you also pull up the weekly chart (not shown), SPY remains in a persistent uptrend since the October double bottom, with strong support from the uptrend line and a bullish crossover of Slow Stochastic.

Although unemployment, GDP growth, and consumer confidence have been loath to improve, the market has held its ground, bolstered primarily by corporate earnings reports that have been quite good – led by the likes of juggernaut Apple (AAPL).

Despite the preponderance of earnings beats, many companies with negative ratings on Gradient Analytics' active coverage list have been the ones to tumble in the wake of lackluster earnings reports. Accretive Health (AH) is the poster child, falling more than 50%. Others include PAREXEL International (PRXL), Alere (ALR), Magellan Health Services (MGLN), Iconix Brand Group (ICON), Netflix (NFLX), Silicon Laboratories (SLAB), Wipro Ltd (WIT), Rockwell Collins (COL), and Gentex (GNTX). Among the handful of stocks getting positive grades from Gradient, Six Flags Entertainment (SIX) and Aspen Technology (AZPN) have given strong reports. This demonstrates the value in an expert team of forensic accountants like Gradient's.

Green Mountain Coffee Roasters (GMCR) is another getting slammed after a disappointing earnings report. It was down over 40% in afterhours trading on Wednesday. Starbucks (SBUX) previously jilted GMCR's K-cups in favor of privately-held Krueger. Now the chairman says he can't predict sales effectively. He also reported falling margins, rising coffee prices, and reduced guidance. Gradient Analytics has been pounding the table about accounting and earnings quality issues at GMCR for quite some time. The stock rose to near $116 last year, but Gradient was warning that insiders were dumping shares in a big way. It's now trading back below $30. Sabrient's quant models have hated the stock, too.

The VIX (CBOE Market Volatility Index—a.k.a. "fear gauge") closed Wednesday at 16.88.

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