Last week the widely followed big capital growth stocks reported earnings and up until Friday, it seemed all was well, and then came AMZN, like a big gorilla weighing in with a 1.68 trillion-market capitalization to spoil the party. The Market Review adds details along with a look at "buy the rumor sell the news" action for the group.

S&P 500 Index (SPX) 4395.26 slipped 16.53 points or -.37% after making a new closing high last Monday and new intraday highs on both Monday and then again on Thursday at 4429.97. After stopping the last seven pullbacks, the odds are good the 50-Moving Average at 4278.13 will do so again on any unexpected decline. On the other hand, with emphasis on unexpected, should any decline continue it could drastically change sentiment.

Invesco QQQ Trust (QQQ) 364.57 slid 3.63 points or -.99% last week after making a new closing high last Monday at 368.49 along with a new intraday high at 368.89 before turning lower. The new operative upward sloping trendline, USTL from the May 18 low at 316.20 crosses at 360 and should provide the first support in the event of an unexpected pullback followed by the 50-day Moving Average at 349.06.

CBOE Volatility Index (VIX) gained 1.04 points or +6.05% last week ending at 18.24. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 1.51 points or -12.68% to end the week at 13.42% vs. 11.91% on July 23.

VIX Futures Premium

VIX futures premium on Friday ended at 15.03% vs. 22.01% on July 23. Still in the bullish green zone with front-month August expiring in 13 trading days on August 18. Typically, volume and open interest seasonally decline in July and August. 

Since most of the volume and open interest are in the two closest futures contracts measuring the volume-weighted premium relative to the standard 30-day VIX provides a good real-time sentiment indicator based upon actual commitments of large Asset Managers and Leveraged Funds. The chart reflects the distance from the VIX to the futures curve computed from the two front month contracts.

Market Breadth as measured by our preferred gauge, the NYSE ratio adjusted Summation Index that considers the number of issues traded, and reported by McClellan Financial Publications, continued lower at a slowing pace until last Thursday with it turned higher. However, for the week it still declined by 29.44 points or -18.40 % ending well below the 50-day Moving Average at 559.82. The bulls will be thrilled should it continue higher and begin resolving the nagging divergence since it will have turned up before the November 2 low at 58.71 that coincided with an SPX pullback low.

The alternate breadth measure based on the percentage of S&P 500 Index stocks above their 50-day Moving Average ended the week at 56.31 up from 34.91 on July 19.

Buy the Rumor Sell the News

Not only on Wall Street, but throughout the investment world, one often hears the warning to be aware of the tendency for prices to rise before an important event only to decline after the actual announcement as speculators who anticipated the news sell into the buying expecting to make a quick gain. Of course, other variables will cause prices to decline such as under reporting analyst's expectations or less optimistic guidance for the next quarter, but selling on the news good or bad also plays a role.

With thought in mind, we decided to try quantifying last week's results after the big six growth favorites reported.

Column 4, ? UP Pre % shows the percent gain or loss from a week before the earnings date to the closing prices on the day before reporting. ? Next Day %, column 6, shows the gain or loss on the next trading day after reporting and then ? End Week % in the last column represents the change as of Friday's close. Since AMZN reported on Thursday the next day and end of week are the same.

Although the results appear mixed for reasons that may go beyond just selling the next day regardless of the reported results, both MSFT and FB seem to fit the pattern of rising into earnings then selling the next day and continuing lower on Friday with FB up 7.81% into earnings and then down 4.01% the next day ending the week down 4.55%.

For AMZN the results appear quite different. First, it declined into the earnings report and then dropped dramatically after reporting. A decline of 1.05% before the report seems to suggest an information leak, one that proved accurate as it ended the next day 7.56% lower. For this case, "sell the rumor sell the news" proved the best strategy.

Of course, reported results and forward guidance along with comments made during the earnings conference calls account for most of the change, but selling on the news can also be important in the short-term especially for strategies like long calendar spreads with short positions in the front month options with temptingly high implied volatility, but with short gamma, since large moves in the underlying stock will result in losses.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing, since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

As the markets continue higher sector rotation continues to complicate stock selection. For example, Monday favored Risk On sectors, Tuesday Risk Off, Wednesday Confused or unclear, Thursday Risk On again, and Friday Risk Off. In the meanwhile, interest rates on the U.S. 10-Year Treasury Note, seem less important having closed Monday at 1.29% and ending the week at 1.24%, down 5 basis points.

Summary

Despite jitters created by AMZN after reporting earnings on Thursday, both the S&P 500 Index and Invesco QQQ Trust again made new closing and/or new intraday highs last week. While both option and futures indictors remain bullish market breath deterioration slowed and may begin improving thereby removing any lingering reasons for cautionary positioning. Although keeping up with sector rotation complicates matters for stock selection. Using a small sample of large cap stocks that reported last week produced interesting but mixed results looking at the tendency to "buy the rumor sell the news."