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Shifting Sentiment – Selling the Pops

Dennis Gartman was on CNBC last night and he was asked the question – What has changed (in reference to yesterday’s selloff).  His answer – Nothing has fundamentally changed, but the psychology has changed.  His statement hits the nail on the head as the sentiment has indeed started to shift to negative.  But the psychology didn’t start changing yesterday – it was just noticed by the mass media yesterday.  The sentiment actually started changing last week when investors started dumping individual stocks on good earnings reports.  And savvy traders who picked up on this tell, were positioned well for yesterday’s selloff because they were no longer buying the dips, they were selling the pops.  Let’s explore the evidence.

Last Thursday, Southwest Air (LUV) reported an excellent quarter with adjusted earnings of $.70 vs estimates of $.55.  They beat on the top line as well.  The stock spiked up in early premarket trade, but then near the open the stock made a sharp reversal quickly falling a dollar and finishing the day in the red.

On Tuesday, Aetna (AET) blew away both the top and bottom line numbers.  The stock rallied sharply in the premarket, but quickly gave back the gains and finished the day sharply in the red.

earnings pop aet july 29 2014

Wellpoint (WLP) followed suit on Wednesday, rallying sharply in the premarket on solid earnings, but then opening at the high and within an hour had fallen more than 8 points from the open.

earnings pop wlp july 30 2014

Wednesday night, YELP reported decent numbers, the stock quickly rallied 6 points after hours, but within minutes gave it all back.  The next day the stock fell another 8 points.

earnings pop YELP july 30 2014

On Thursday morning, both Exxon Mobil (XOM) and Mastercard (MA) reported good quarters.  Both stocks again popping in the premarket, but then quickly giving the gains back and finishing heavily in the red.

earnings pop xom july 31 2014

earnings pop MA july 31 2014

It is one thing to sell a stock on a disappointing earnings report, it is quite another to sell a stock on a strong report.  But that has been the trend for the past week, and that was a tell.  The market was telling us from the action of these individual issues that sentiment was shifting.  Investors were taking chips off the table despite strong fundamental reports.

Argentina might have been a catalyst that kick-started the masses into selling yesterday, but the smart money was reading the trading action earlier this week and instead of buying the dips, they were selling the pops.

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