WHERE THIS MARKET IS HEADED
As you can see by both charts there is more room
for the markets to move higher inside their existing channels—but not a
whole lot more. We’ll likely see some follow-through momentum early this
week and then some retracement—especially if the firms reporting this
week don’t tear the cover off the ball. The big picture is that the
overall trading channels are up but we still haven’t had big enough
volume to confirm the move.
Friday was an
option expiration day, which should have generated a huge volume spike
but it was surprisingly light. Volume across all markets was only 7.3
billion shares compared to the 10.4 billion on expiration day in
March—and that was without Google’s earnings. The internals were very
good with advancing volume 6:1 over declining and new 52-week highs at
215---the largest number since Dec-26th. That is bullish but after a
week of strong gains you would expect new highs to be strong. We need to
see more volume before we can really claim this rally is here to stay.
That said the bulls are pretty darn happy after
this past week’s gains---at this time last week every analyst out there
AND the charts were predicting a crash after GE’s earnings--and the
exact opposite happened—so what changed?
Surprisingly strong
guidance out of a far ranging group of stocks including Intel, IBM,
Merrill Lynch, Caterpillar and Google created a short-covering really
that rocketed stocks straight up. Is a weakening economy behind and are
we due for more stellar earnings this coming week? The key is where
those earnings are coming from.
Most of the
companies that reported last week made the majority of their money
overseas instead of inside the U.S. Intel gets 80% of its earnings from
outside the United States, IBM 65% and CAT 60%. Even Google got 51% of
its earnings for the quarter from overseas sources. These companies are
relatively insulated from any US slowdown and their earnings show it.
Unfortunately that
can’t be said for many of the companies due to report over the next two
weeks. As the earnings process moves forward the quality of the
companies reporting deteriorate. The large multinational blue chips
report early in the cycle and the smaller less diverse companies report
later.
Next week we get
massive earnings data from over 970 companies reporting and it’s a mix
between companies that make their money internationally and many that
are mostly subject to the domestic market. Bank of America reports on
Monday and derives the vast majority of their profits from US
operations—if they lose less than expected it will be bullish but many
analysts are worried about a downside surprise. Other primarily domestic
market companies include UPS and YRC which will both be a good
reflection of the overall US economy—with parcel volume down and fuel
costs up, expectations are not high even though both stocks turned
higher this past week.
We’ll also get
earnings out of Yahoo on Tuesday with more news about the Microsoft
offer. Apple, Amazon and UPS report on Wednesday. Amazon exploded higher
by $6 on Friday after the bullish Google report but it will be
interesting to see if the Google glow spreads to AMZN when their actual
numbers are reported.
Apple is expected
to post very strong earnings but there are some worries that iPhone
sales have slowed as consumers wait for the 3G version rumored to be out
in June—that said the stock looks to be a good buy on any dips early
this week.
Thursday has
Microsoft and they are expected to post strong numbers in spite of
spreading Vista resistance. American Express also on Thursday will be a
good indication of consumer spending. MMM will be a key to watch for
the manufacturing sector with excellent overseas exposure and MOT will
be a good update on the chip sector.
The key here is
that companies have been lowering their expectations for months so there
is a good chance for plenty of upside surprises.
One of the biggest
side-effects of last week’s positive earnings is a lowering of
expectations for another big Fed rate cut. Just over a week ago there
was a 79% chance of a 50-point cut at the next meeting but by the end of
last week that has fallen to less than a 50% chance of a 25-point rate
cut. The amazing thing is no one seems to care about the loss of the
rate cut with the Dow up 523 for the week! However if we see some
negative earnings that may change as we get closer to the next FOMC
meeting on the 29th.
After this past
week hopes are high and traders are looking for an excuse to buy—but
there are still concerns—one of the biggest being the price of energy.
Oil hit 117 per barrel Friday and has been moving almost straight up
since January. Four US airlines have gone out of business over the past
two weeks and every consumer survey out there points toward a pull-back
in discretionary spending as a higher percentage of household budgets go
toward gasoline.
But even high fuel
costs may buoy this market in the short term--more than twenty energy
companies report this coming week while Exxon and Chevron report the
following week. Schlumberger (SLB) reported an 18% increase in their
bottom line on Friday and that trend in the energy sector is likely to
continue as product demand and pricing remain at historic highs.
There is still
little evidence the economy is moving out of a recession but traders are
betting the bottom for the stock market is in. Even though the markets
are rising there will be pull-backs so timing is key—which is why we’ve
drawn the channels on the charts above. The smart money buys at the
bottom of the channel and places stops just below the uptrend support
lines with the intention of riding the next leg higher. The channels
also tell us there is more upside room from here on the right stocks—the
question is…
HOW DO WE MAKE MONEY ON IT?
We’ve got two high
potential plays lined up this week—one bullish showing good relative
strength and the other bearish with contrasting relative weakness.
Our first play is
bullish and it’s on a major US based industrial equipment company that
is deriving the majority of its profits from emerging high growth
overseas markets. Early expectations for earnings are excellent and the
stock just broke out of a two-month range Friday on HUGE volume! The
stock looks poised for a ten dollar run to the upside and we’ll be
getting in on the beginning of the move for what looks to be some
impressive upside profits.
Our next play is
bearish and it’s on a company tied to the discretionary spending
domestic market—the worst place to be right now. While the rest of the
market zoomed to the upside last week this stock dropped almost ten
percent of its value—imagine what will happen if the market actually
pulls back! With both the stock and its prospects heading south this
stock looks like a great put play and we’ll be taking a position first
thing Monday morning.
We’ve got two great
plays lined up on both sides of a market poised to move—so let’s get
going…
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