Before the Bell – Wednesday, August 5

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Good morning. The market got the confirmation we have been waiting on all week, the Dow and S&P 500 closed at record highs, and one stock handed us a live demonstration of what an earnings surprise does. Eli Lilly reports before the bell today.

Tuesday was a powerful session. The Dow Jones Industrial Average rose 1.71% to 54,085.88 and the S&P 500 gained 1.79% to 7,736.52, both closing at record highs. The tech-heavy Nasdaq jumped 2.59% to 26,584.99, pushing back above its 50-day average line, and small caps rose 1.85% to their best close yet. Per Investor's Business Daily, the Nasdaq's four-session advance of 8.8% is its strongest since April 2025. Helping the whole thing along: crude oil tumbled 5.7% to $75.77 a barrel, down more than 10% this week, as officials sounded hopeful about a deal to reopen the Strait of Hormuz, and the 10-year Treasury yield eased to 4.625%.

Beginner note: on Monday we said the rally was on day three and that the earliest a follow-through day could arrive was Tuesday. It arrived, and the way it arrived is the lesson. A textbook follow-through wants a decisive gain on heavier volume than the prior day. Tuesday delivered the gain, but the number of Nasdaq shares traded was actually below Monday's. What rose was dollar volume, the total money changing hands. IBD's read was that the Nasdaq "arguably" confirmed its rally. Sit with that word. Real signals often arrive smudged rather than clean, and a method that only works on perfect data is not a method. What you do with an arguable confirmation is start small, not go all in.

Yesterday we put Palantir on the radar with a note of caution: enormous expected growth, but a chart sitting 41% below its high. It reported Monday night, opened Tuesday at $145.15 against a $125.65 prior close, and finished the day at $162.66, up 29.45%.

Two honest lessons sit inside that. The first is that a chart being far from its high does not stop a stock from moving; it tells you about risk and timing, not about direction. The second is the more useful one, and it has a name: post-earnings announcement drift. It is one of the most replicated findings in finance research. Stocks that deliver a genuine earnings surprise tend to keep drifting in the direction of that surprise for weeks afterward, rather than repricing all at once on the day. The reason is that the market updates its estimate of a company slowly, in stages, as analysts revise and institutions build positions over time. That single day is rarely the whole move, up or down.

The practical use is not to chase a 29% gap, which is by definition extended and a poor risk. It is to understand that the report is a starting gun, not a finish line, and that the weeks after a surprise are where the tradeable move often lives. That principle, incidentally, is exactly what William O'Neil was chasing when he built the 25% earnings test. He did not choose the number by intuition; he studied the great winning stocks of past market cycles and found that they almost all showed strong earnings growth at the moment their advances began. The rule came out of the research, not the other way around.

$ANET ( ▲ 0.78% ) makes the high-speed networking switches that connect servers inside big data centers, which is the plumbing every AI build-out depends on. It closed Tuesday at $190.51, up 3.04%, after touching $194.35 during the day, a new 52-week high. Then it reported after the close, beat on both earnings and revenue, raised its outlook for the current quarter, and spiked further in extended trading.

Why it is worth watching: Palantir shows you the drift after a surprise. Arista lets you watch one begin, from a very different starting position, and that contrast is the whole point. Palantir gapped from far below its high. Arista is reporting good news while already at a high, which is the setup CAN SLIM actually favors, because a stock making new highs on good news has no overhead supply of trapped sellers waiting to get out. Watch how it trades today rather than acting on an after-hours quote. After-hours prices are thin and often wrong.

Educational content only. Not financial advice. Past performance does not predict future results. Read the full financial disclosure.