It’s been another wild and profitable week as the
markets continue to gyrate in both directions---
PUBLIC SERVICE ENTERPRISE GROUP (PEG) SHOT
THROUGH THE ROOF MONDAY ROCKETING OUR JAN 100 CALLS TO A FAST
TWENTY-NINE PERCENT PROFIT!
We got out of PEG for a fast and generous profit
but those of you that hung on one more day did even better as PEG shot
up over six dollars in just two days!
Plus we took advantage of the big move up Thursday
to get our money out of RIMM just above break-even saving our investment
before it fell off a cliff Friday. It was a good week with one nice
winner and no losses. Now we’re all back to cash and ready with two more
high potential plays this week. I’m excited to tell you about them but
before we get to the details let’s take a good look at…
WHICH WAY THIS MARKET IS HEADED
The charts above show a
pretty bearish picture--since the start of the year, the S&P has dropped
4.6%, while the Nasdaq has plummeted over 8%. Then Friday stocks
stumbled sharply lower with the Dow hit by its worst
first-eight-trading-days in 17 years, as write-downs, slashed profit
forecasts and slowing consumer spending accelerated the selling.
But as the charts
above also show the markets don’t move in a straight line and we may be
due for a tradable bounce higher—in fact the situation is a lot better
than the closing numbers looked on Friday. The Dow was down over 300
points by mid-afternoon and recovered to hold support at 12600, while
the SPX and Nasdaq saw similar bounces into the close.
If you look at the trend on the internals over the last seven days we
saw a ramp up in volume and negativity to what appears to be a
capitulation sell-off event on Wednesday with nearly 9.3 billion shares
traded across all exchanges and a whopping 1530 new 52-week lows. On
Thursday the markets racked up another 9 billion in volume with a trend
reversal in the internals. Friday was a return to selling with market
whacking news out of American Express (AXP), Tiffany’s (TIF),
McDonald’s ( MCD) and RF Micro Devices (RFMD).
By the looks of
things it was the last opportunity to warn before the earnings avalanche
begins next week and a truckload of companies took advantage of it. We
also had the fear of further massive write-downs from the financial
stocks reporting next week.
Citigroup reports
on Tuesday and they are now expected to write-down as much as $24
billion in loans and CDOs. Along with that monster hit they are expected
to report another bailout by a consortium of firms that could be as much
as $15 billion. Regardless of how it is structured this will be dilutive
to the current shareholders but shares of Citi have been up for the last
two days—an indication that perhaps the worst is already expected and
buyers are looking for a bottom.
The rest of the
major players are also in the crosshairs with Merrill expected to
announce write-downs increasing to $20-$23 billion from the current $8.5
billion. Morgan Stanley’s losses could explode to $9 billion and Bear
Stearns is likely to report another $2 billion in damage. This looks to
be the quarter all the majors will be dumping their worst news into to
try and get it behind them and set up for better comparisons in the
future.
In addition to
historic losses at the big brokers American Express warned Friday it is
taking a $440 million Q4 charge due to increased delinquencies and loan
write-offs. AXP reported extreme weakness in states with the largest
real estate problems like Florida and California and were surprised by
the acceleration of the problem. The company will report earnings on
Jan-28th and warned those earnings would be around 71 cents—far below
the prior year's comparison quarter.
In addition
American Express warned that further tough times are dead ahead and
growth in cardholder spending is slowing. These warnings are troubling
because it was thought the problem was restricted to borrowers at the
lower end of the economic scale. The higher net worth American Express
customers were thought to be immune to credit weakness but this most
recent report shows the problem is spreading up the food chain. Remember
with 75% of the US economy driven by the consumer a spending slowdown
almost guarantees a recession. AXP fell -4.92--and was responsible for
nearly 40 points of the Dow loss.
With the current
warnings factored in the SP-500 now expects financial earnings for Q4 to
drop a whopping 72%, dragging the entire S&P earnings to an -11.3%
decline. The good news is without the financials the rest of the S&P is
expected to post +11.6% earnings growth while energy will likely jump
20% and the techs are slated to be up over +22%.
The tech sector has
been the bright spot for the quarter and there are two major tech stocks
reporting this week---Intel on Tuesday and IBM on Thursday. These two
companies will either be the tech saviors or the big disappointments
that force the Nasdaq through support.
Intel is expected
to report earnings of 40 cents and IBM is expecting $2.60 for Q4.
Seagate will also report and they were making very bullish comments at
the CES Conference early last week. Evidently the demand for disk drives
is very robust suggesting overall tech demand is also strong. As long as
Intel or IBM does not drop an earnings bomb this could be a turning
point for tech stocks and the Nasdaq chart looks like it has been
forming a bottom with Friday’s low coming in higher than Wednesday’s.
This is also going
to be a prime week for determining guidance. The guidance for Intel and
IBM will be more valuable than their actual earnings numbers. We also
have MacWorld kicking off this week potentially boosting Apple while GE
reports on Friday---GE’s guidance will be seen as a proxy for the entire
U.S. economy because the company is diversified into so many different
sectors.
Another potential
bounce-maker is the Fed. The big market comeback on Thursday was ignited
by Fed Chairman Bernanke's speech indicating he was not super concerned
about inflation and more focused on boosting a slowing economy.
Investors know that means only one thing—more rate cuts. As long as the
inflation reports next week (PPI/CPI) are tame then the Fed will be free
to cut aggressively.
The problem is the
last reports were pretty inflationary--in November the PPI headline
number spiked +3.2%--the second highest gain since the PPI began in
1947. The core rate rose +0.4% and that was also well above the recent
ranges. The CPI jumped +0.8% in November---the largest increase in over
two years.
Those numbers have
got to be giving the Bernanke Fed indigestion in the current
recessionary environment. The Fed is likely waiting to move on rates
until they get the numbers from the December PPI/CPI due out next
Tue/Wed. Since we are still more than two weeks away from the January
29th FOMC meeting we could see an intermeeting rate cut as early as
Monday since the Fed will get an advance look at the PPI/CPI—if that
happens expect the markets, especially the financials—to explode higher.
Although a pre-meeting rate cut would be super bullish in the short term
it will likely create more of a super attractive shorting opportunity
than anything as the long term picture still looks bearish.
Bernanke will also testify on Thursday to the House Budget Committee on
the outlook for the U.S. economy where he’ll be grilled intensely on
what the Fed is doing to restore growth—another reason why the Fed may
want to act early and cut next week.
So we’ve got a
market hit by an intense sell-off, more financial sector losses due this
week, a Fed itching to cut and a market potentially ready to explode
higher—the question is…
HOW DO WE MAKE
MONEY ON IT?
We’ve got two
excellent looking plays lined up this week—one bullish and one bearish.
Our bullish play is
on a tech stock due for a dramatic move higher—it’s formed a solid
bottom this past week with a chart looking like a launching pad. This
coming Tuesday news will be released on this big mover that should have
traders buying in anticipation with both hands starting at the open on
Monday---a position we’ll be jumping on immediately. This is a super
short-term play that could have us reporting another big winner by this
time next week!
Our next play is
bearish and it’s on a company in the consumer credit sector that has
already confessed consumption is slowing and earnings will be way down.
The chart shows the stock steadily trending lower and all we’ll need is
a little bump higher for a perfect shorting entry point---a bump we’re
likely to get this week with any positive rebound in the markets!
We’ve got two great
plays lined up ready to profit from the market at hand—so let’s get to
it…
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