By Nicholas Santiago on January 20th, 2010 3:31pm Eastern Time
As corporate earnings season is fully underway many of the shining star stocks have sold off after their earnings release. The first major stock to report two weeks ago was Alcoa (NYSE:AA). The stock had an amazing move higher trading at a high print of 17.60 prior to it's earnings release. Once the earnings were released the stock sold off and it now currently trades at 15.25. Some recent stocks that have followed this pattern are Intel Corp (Nasdaq:INTC), International Business Machines(NYSE:IBM), and J.P. Morgan Chase (NYSE:JPM) which all had negative reactions after their earnings release.
Why did these market leading stock sell off after their earnings announcement? The answer is simple. These stocks have simply rallied too far too fast and the premium was already built into the current stock price. It is important to remember that stocks are very similar to a pendulum. They swing too far to one side and then they swing too far to the other side. The stock market is mechanism of extremes of human emotion.
It is important to remember that everyone loves to be on a winning team. How often do people root for a sports team that is winning even when they don't like the sport or know who is playing on the team? The same thing occurs with the institutional money. They simply jump on board a stock and drive it higher into an event such as earnings. Then when the public wants to buy the stock and be part of the team they simply pull the rug right out from under them and sell the stock as the public is buying. Really it is a genius plan when stop and think about it. Therefore, as a rule, stop and look at a chart before buying a stock into an earnings release or major event. If it has traded higher in parabolic fashion before earnings stay away for while as the earnings or whatever event it may be have been priced in already.
Nicholas Santiago,
Chief Market Strategists
www.InTheMoneyStocks.com
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