Thursday, December 13, 2007
The most important, market-moving news this week isn't coming from the Fed... and it's not coming from the White House either.
The most important news is coming from one of Wall Street's largest investment banks, Lehman Brothers (LEH).
LEH reports earnings this morning. In fact, the news should be out even before you read this.
It doesn't matter so much whether Lehman's earnings are good or bad. What matters is how the market reacts to it.
You see, the market's next move is all up to the financial stocks.
Finance stocks led the market lower in November, and they've led the market higher so far in December. The S&P 500 has gone from severely oversold to severely overbought, and it's now stuck in neutral. In fact, at 1,480 the S&P 500 is smack dab in the middle of its recent trading range between 1,400 and 1,560.
Financial stocks are neutral as well.
Take a look at this chart of the financial sector bullish percent index...
A bullish percent index is a momentum indicator. It illustrates the percentage of stocks in a sector that are in an uptrend. Readings near 80 indicate overbought conditions, and readings below 30 are oversold.
You can see the overbought condition in October that foreshadowed the market's decline in November. And you can see the severe oversold condition in late November that led to the recent sharp rally.
Right now, though, this indicator offers little direction. Financial stocks are neither overbought nor oversold. The bullish percent index is smack dab at 50.
It doesn't get any less decisive than that.
News out of Lehman this morning, however, could get this indicator moving again...
If LEH reports better than expected earnings – or less of a disaster than expected – and the market reacts favorably, then we're off to the races again, and we could challenge new highs by the end of the year. Likewise, if LEH announces horrible results and the market shrugs it off anyway.
On the other hand, if Lehman disappoints the Street and investors pummel the stock, it's going to be tough for the overall market to catch a bid. Stocks will probably languish for the rest of the year.
The worst scenario, by far, would be for LEH to beat expectations and see investors crush the stock anyway. Wall Street has no tolerance for depressed stocks that can't rally on good news. If this scenario unfolds, then the S&P 500 may be headed for a retest of the recent lows around 1,400.
Pay attention to how Lehman acts today. It will give you a good clue as to what to expect for the rest of the year.
Best regards and good trading,
Health care leads the market... Respironics (devices), Haemonetics (devices), Covance (CRO), Merck (Big Pharma), Sanofi-Aventis (Big Pharma), and health care ETFs make new highs.
Beverages up... Coca-Cola and Pepsi at new highs.