Reading the Apple-IBM Tea Leaves

Chicken Little got everyone upset by spreading the rumor that the sky was falling.  Apple and IBM both reported their earnings yesterday, and there were immediate calls for a Chicken-Little-like response.  Duck and cover?  It’s not that simple.

Both Apple and IBM beat estimates, for starters.  It’s nothing new for Wall Street to sell off companies who meet and even beat expectations.  The classic “buy on the rumor, sell on the news” mindset is exaggerated these days because hedge funds don’t hold stocks as an investment, the trade them to take advantage of either price increases or dips.  When earnings have been reported, the prices tend to settle and news is more scarce, and thus it’s fashionable to sell them off and move to something else.  All this means that sudden stock movements don’t necessarily mean anything, which is comforting for Apple whose shares dipped over 5% after hours.

We need to see how Apple’s or IBM’s outlook might reflect on 4Q.  The holidays are critical, not only to draw down inventory but also because consumer attitude can’t easily be turned around except in November and in May.  If we miss the current opportunity, we’ll have six months of slow growth and 2011 won’t measure up.  If we meet or exceed holiday expectations, our model says we’ll have an upside surprise next year in tech and in the economy overall.

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