Why Tech Earnings Could Decide Market's Direction
The Dow Transports, Russell 2000, S&P 400 and S&P 600 have all made new highs—a bullish sign. The S&P 500 has broken out above its 2012 high, and is at a five-year high of 1492. The Dow closed Tuesday up 62 at 13,712. That put it at a five-year high and above 13,661, its 2012 intraday high for the first time. (Read More: 10 Stocks Send Transports Surging)
The one index that hasn't joined the move to highs is the Nasdaq, heavily dependent on technology stocks and the performance of Apple, which reports earnings Wednesday. The move in the indices, however, is positive and it suggests the market could move higher, as buyers are drawn in.
"It's (viewed as) bullish, and there's more to go. That very well could be the case," said Carter Worth, Oppenheimer Asset Management's chief technician. "The issue is how can you be at all-time highs and have some prominent names, such as Wal-Mart, AT&T, Philip Morris, Apple and Coke just dragging…Intel was a testament to it last week."
But IBM and Google both reported better-than-expected profits after Tuesday's close, and their stocks moved higher. Even Apple shares rode a half percent higher in late trading, amid the positive reports from tech names, including Advanced Micro Devices.
"In order for us to keep going, tech has to join. So far, so good with IBM and Google, and now we have to see what happens with Apple," said Scott Redler of T3Live.com "We can take out the old highs in the S&P, but it doesn't have to happen in the first half of the year. It can happen in the second half."
Worth, who is negative on the market now, said a case in point could be made by looking at the S&P 100 last week.
"The best single performer was Dell, and the worst was Apple. One is basically a dinosaur selling buggy whips," he said of PC maker Dell. But Apple is one of the most valuable enterprises in the world, and yet its stock has suffered a near 30-percent decline from its high on growth and margin fears. Dell has moved higher on leveraged buyout talk. (Read More: 'My Bet Is Up in Apple': Najarian)
So far in January, the stock market is up more than 4.5 percent. About 13 percent of the S&P 500 companies had reported earnings by Friday, with 62 percent beating estimates, according to Thomson Reuters. Now the earnings wave has turned to tech, and traders say this could be make or break time for the rally which started in November. Microsoft also reports this week, after Thursday's closing bell.
"If Apple and Amazon put up big numbers and go up, this market is going higher," said Worth. But Worth said if there's a big miss in tech land and stocks get hit, "it wouldn't be casual, it would be violent."
However, Redler says that even if Apple misses, the market is used to moving ahead without it, and it may continue to do so.
"I think the market is psychologically prepared to continue without Apple, and if Apple gets involved, it could give it a little bit of an adrenalin shot," said Redler, who follows the market's short term technicals. He is playing the Apple trade through options, by buying $525 calls and selling $550 calls.
The positive reports from Google and IBM triggered a sharp jump in stock futures after Tuesday's close. Google reported earnings per share of $10.59, and the stock jumped four percent.
That was a far cry from last quarter when Google missed its estimate. Google was expected to report fourth-quarter profits of $10.49 per share on revenues of $12.3 billion, according to Thomson Reuters.
IBM stock also moved sharply higher after both profits and revenues beat estimates. The company reported $5.39 per share, compared to estimates of $5.25.earnings and year ago profits of $4.71 per share.
"Google and IBM have both been lagging the tape over the course of the last month," said Redler. "As indices made new highs, there's been concern about Google and IBM, and their lack of participation. I think the market did well going higher without them, so it will be interesting to see what happens if their gap up holds."
Apple is expected to earn $13.43 per share, a three percent decline from year ago levels when it reports after Wednesday's close. Amazon reports a week from Tuesday, and it is expected to report lower profits of $0.27 per share but sharply higher revenues of $22.3 billion. (Read More: Apple Earnings Need to Overcome Technical Malaise)
Redler said he is playing Apple by buying $525 and selling $550 calls, but if it misses and falls, he will be buying it. He said there's micro support for Apple at $470 and macro support at $440.
Paul LaRosa, technical strategist at Maxim Group, is also watching tech earnings because of the Nasdaq's failure so far to return to highs.
"The Nasdaq needs to close over 3200. That's the one fly in the ointment," said LaRosa. "If that doesn't happen, with the other three, it could lead to a negative divergence and lead to a sell off. I don't think people can turn totally bullish yet. We're still cautiously optimistic."
The Nasdaq, up 8 at 3143 Tuesday, was at 3196 in September. It last closed above 3200 in November, 2000.
"To me, it's curious why the Nasdaq isn't over 3200, if the others are at highs. Obviously, Apple is a big weighting," he said. For instance, Apple is 14 percent of the smaller Nasdaq 100 index, and was 19 percent before its decline. LaRosa said the Nasdaq's performance will certainly be influenced by the wave of tech earnings. "It's a key week," he said.
But to Worth, it's the whole range of major stocks that aren't moving higher that is the concern, and that's what's holding back the S&P. He also notes that some stocks have already made their moves, such as Ford and Goldman, and they are getting tapped out. He said another negative is that investors—individuals who are starting to put money into mutual funds and hedge funds managers—are all getting too bullish.
The S&P's next milestone would be 1,500, a psychologically key number, but to LaRosa, the number to watch would be 1,575, above its 1,565 closing high from 2007. (Read More: Are Stock Market Bulls Too Hopeful?)
"The longer it takes to punch through the more the likelihood is you're not going to punch through, and you hit a near-term top. The strength has taken some people by surprises but you just can't say buy across the board," he said.
But it could go higher. "Maybe the fear and greed drives the market to extremes. You may have the greed factor and people say 'I'm missing it.' That pushes it to extremes," said LaRosa.
What Else to Watch
Other companies reporting earnings Wednesday include McDonald's, Novartis, SAP, Siemens, United Technologies, Abbott Labs, Coach, and WellPoint, ahead of the opening bell. Besides Apple, Amgen, Altera, F5 Networks, Netflix, Noble, Raymond James, Sandisk, Stryker, Symantec and Western Digital report after the closing bell.
There are two housing-related reports Wednesday. One is weekly mortgage applications at 7 a.m. ET, and the other is the FHFA home price index at 9 a.m.
The House of Representatives is expected to vote on legislation extending the debt ceiling until May, clearing the way for a budget battle with Senate Democrats and avoiding a debt ceiling battle, for now. Part of the bill will suspend Congressional pay as of April 15, until there is a budget accord.