Thank God for Goldman!

Earnings season is officially upon us!

Big banks kicked things off this week — and the reports were not nearly as bad as some had feared.

JPMorgan crushed the Street’s expectations, lifting the Dow in the process. Citigroup Inc. reported strong results from its trading arm.

But the Vampire Squid is this week’s true earnings season winner. That’s right — a blowout quarter courtesy of Goldman Sachs crushed the naysayers and help lift the Dow Jones Industrial Average out of its recent funk.

I’ve talked at length about the tech takeoff that has driven the incredible recovery rally we’ve enjoyed since the market bottomed in March. Yes, these stocks deserve most of the credit for dragging the averages higher over the past three and a half months. But we started to notice some rotation away from tech this week…

The Nasdaq Composite couldn’t completely overcome its ugly Monday reversal this week and remains in the red as we approach the end of the week. As of Thursday afternoon, the Nasdaq was down about 1.7% on the week. Meanwhile, the S&P 500 had rallied a little less than 1% and the Dow Jones Industrial Average posted an impressive gain 2.5%.

Does this mean a wipeout is on the way for our beloved tech trades? Probably not. But it does highlight how important it is for traders to learn how to take profits on the big rips higher. Remember, we’ll always see some unwinding and profit taking when the market gets a little frothy. That gives us a chance to take a step back and reevaluate the risk-reward for new trades. Tomorrow always brings more great opportunities for trading profits!

As for today, we’re thankful for Goldman’s strong earnings beat that lifted the Dow and sparked some fresh breakouts in some lagging names. It’s a great start to the season, and I can’t wait to see what happens over the next several weeks as we trade what we see.

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Chart of the Day: Small-caps break out

greg
We’re getting some of the rotation we’ve been waiting for as the trading week winds down. The Dow and the S&P led the Nasdaq so far this week, as Alan mentioned. But the real standouts were the small-cap Russell 2000 and the Dow Transports.

The strong moves began Wednesday when the Russell gapped higher and finished the day up more than 3.6%. Meanwhile, the transports gained 2.8% on the day. Remember, these groups were crushed during the March crash and continue to lag the major averages. So, it’s interesting to see buyers stepping in here.

Here’s a closer look at the small-cap breakout:

IWM

The iShares Russell 2000 ETF (NYSE:IWM) coiled for more than one month before finally posting this beautiful upside breakout earlier this week. That’s a bullish sign for the markets now that we’re seeing participation from some groups other than the big tech names. Don’t write off these small stocks just yet!

Trading Tip of the Day

Market conditions are constantly changing — and it’s our job as traders to figure out when it’s time to go all in, and when we’re better off sitting on our hands.

Remember, we’ve enjoyed an incredible recovery rally off the March lows. Led by the household name tech stocks and the upstart “shutdown stocks” that have recently captured investor’s imaginations, fast gains have been ours for the taking.

But this week has brought with it a little market rotation, along with some choppy action. As the market adjusts and some of the strongest performers consolidate, we must follow their lead. Randomly buying the hottest, soaring tech names just won’t cut it right now. Instead, it’s time to get tactical. Pay close attention to price and emerging trends. That’s your best shot at finding the market’s next big winners.

— Greg Guenthner

You May Also Be Interested In:

Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

Transitioning from a clerk to a floor...

View More By Alan Knuckman