Actionable insights straight to your inbox

Equities logo

Taking Advantage of Earnings Drift as Dow Retreats from 20,000

You can still prolong the bull by targeting earnings drift companies. via Flickr

The elusive 20,000 Dow Jones mark has been reached, passed, and fallen under again over the past week. It took DJIA 17 years and 10 months from 10,000 to 20,000. Similarly, it took 14 years and 2 months to bring DJIA to 2,000 from 1,000.

In addition to the same percentage advances to the levels 2,000 and 20,000, these two historical marks share other resemblances as well. The crossing of DJIA 20,000 first happened on January 25, 2017; while the DJIA 2,000 mark was passed on January 8, 1987, and that time, it didn’t head back. Both took place in secular bull markets after breaking out from short consolidations. But this time, DJIA could not hold on for long and shortly thereafter retreated below the 20,000 level.

As Sam Stovall said, it may take multiple times to open this rusty door to the 20,000 level. Technical charts seem to show concern about the short consolidation around 20,000: if the market keeps rising without necessary pullbacks after it crosses 20,000, the chance of the market topping will increase. This was what happened in 1987.

Hirsch Trifecta

Yale Hirsch first proposed this trifecta: The Santa Claus Rally (SCR), the First Five Days of January (FFD) and the January Barometer (JB). Often, if the market is up the first five day in January, that suggests it will continue that way for the remainder of the year. The Santa Claus Rally refers to the common practice of the market rallying up into the holidays at the end of the year. The January Barometer suggests that if January is up, look for a gain for the rest of eleven months. Jeffrey Hirsch found that since 1950, when the full Trifecta appears, S&P 500 advanced 89.3% of the time during the subsequent eleven months, with an average return of 12.7%, and 92.9% of the time for full year, with an average gain 17.8%.

JB this year has risen only 1.8%. If S&P can gain an average of 17.8%, it will need to go another 15.7%. But in 1987, the Trifecta also happened, with JB rising 13.2%, while the rest of year dropped 9.9%, and the whole year up only a tiny 2.0%.

In 1987, after surpassing 2000, DJIA climbed another 36% to the peak of 2722 on August 25, 1987.The market only had a 10% shallow correction from April to June. On October 19, 1987, DJIA fell 508 points, -22.6%, the sharpest one-day drop in history.

Although this historical precedent may not repeat anytime soon, it could provide some guideposts to map the market movement ahead. After failing to capture the 20,000 mark, DJIA may reorganize its force and attack the 20,000 mark again before it meets some fierce selling pressure in normal bearish season (May-October).

In hindsight, the 1987 market went too fast, especially in the first month–up 13.2%. As long as the market does not move too swiftly and climb a wall of worry, the DJIA uptrend may continue for a while, although the advancing pace will slow.

Trump 100 Day Stocks

Trump 100 day market coincides with the rest of bullish season–from October to April. It could ride through the Obama era’s momentum and expectation on Trump. The shocks of Trump’s executive orders, such as travel ban, should not constitute catalysts for the market to enter a major correction for the time being, even though the market selling pressure has been mild for more than three months. The reality check of the Trump effect won’t kick in until next earnings season.

Since the latest economic data are weakening, the Federal Reserve may not raise the federal fund rates. Currently, the federal fund futures indicate the earliest time the Fed could raise rates will be May 3rd by 25 basis points, with a chance of 32.8%. And the markets will continue to move on earnings reports, rewarding those with solid earnings and revenue growth, but punishing those that show poor results .

Unlike the past seven years’ earnings seasons, when investors tiptoed before earnings released, it is common that market players now bid up shares briskly well before earnings reports, with most stock prices extending beyond proper entry points. To mitigate the position risk, some market players often take profit after earnings reports, causing shares lacking the meaningful follow-through. However, this bullish season could be still played out by buying dip with the solid post-earnings drift.

There are several candidates for the earnings drift play:

Alibaba (BABA), Western Digital (WDC), Mercury System (MRCY), and TAL Education (TAL). The first two stocks are large caps, and the last two mid-caps. All four of those growth firms reported excellent earnings with solid guidance. On January 26, Mercury announced 6 million secondary issuing at $33. So far, its stock price reacted well to the issuing news, and may have good chance to move up after it finishes the offering on February 1, 2017.


This is just personal opinion, and personal opinion is often wrong. Currently, the author has no position on any of the above mentioned stocks, and may or may not build any position on any stocks above in the future.

AT&T, T-Mobile and Verizon should be turning the volume up. Their current quiet murmur is just not enough.