MLR - Morning Market Comment for Friday October 26, 2012

Published : October 26 2012 at 9:22 ET

The major indices ended barely changed on the day. The NASDAQ Composite knocked on its 200-day moving average for the third day in a row. After hours, both (AMZN) and Apple (AAPL) reported earnings which disappointed investors at first, taking the NASDAQ Composite down -1.7% in after hours trading then both stocks quickly rebounded, recovering most of the initial losses. If the futures moves this morning hold, the NASDAQ will open up below its 200-day moving average, breaching this key moving average for the first time since June of this year.

AAPL fell short on earnings due to a slowdown of iPhone sales and lower-than-expected iPad shipments. Indeed, quarterly earnings have decelerated, dropping from 116% growth on a year-ago basis to 92%, 20% and now 23%. Revenue has also decelerated somewhat, falling from 73% to 59%, 23% and now up to 27% compared to the same quarter a year ago. Wall Street expects 11% EPS growth in the next quarter, and with AAPL selling at 14 times forward estimates, one might consider the stock "overvalued." AAPL has been selling at about 12-14 times forward earnings for some time now, and while some might consider this "low" P/E as insurance against the stock selling off further, we would argue that paying 14 times forward estimates for an 11% earnings grower may be paying too much! Now we know what the market saw a long time ago given that AAPL has been selling at a 12-14 forward P/E for quite some time.

AMZN posted its first quarterly loss in nearly a decade as it continues to pour money into an ongoing expansion that has eaten away at profit margins. AMZN also came in below expectations on revenues for its third quarter and sees Q4 revenue below consensus.

In today's premarket session, AMZN currently trades 1.5% below yesterday's close and AAPL roughly flat. The U.S. futures markets are selling off along with European bourses at the time of this writing, partly due to concerns about the global economy that were underscored by South Korean GDP data showing its growth slowed to 1.6% in the third quarter from 2.3% in the previous quarter which amplified concerns about profit weakness in China.

U.S. GDP data is due out at 8:30am EST, and the University of Michigan’s consumer sentiment index for October is expected to show little change, with economists forecasting the reading to tick down to 83 from a preliminary reading of 83.1, which was the highest level since September 2007. The index is due at 9:55am EST.

We see one potential bear flag set-up on the short side: Google (GOOG), using the two-day high at 687 as a quick stop. Downside target for GOOG is the 200-day moving average down at 633.48.

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