Bulls Take a Breather as Momentum Slows

Friday’s 70 point advance pushed the Dow Jones Industrial Average above 11,200 for the first time since September 2008, marking the eighth straight weekly gain, an achievement not executed since 2004. Momentum was slowed today by Citigroup (C), who declined as the U.S. Treasury began to unwind its stake in the bailed-out bank, and Goldman Sachs (GS) which slipped ahead of its testimony before a Senate subcommittee. The Dow was still able to eek out a gain that translated into a new 52-week high, but the weak close left a feeling of lack luster performance.

Only 13 of the 30 Dow stocks closed higher with Caterpillar (CAT) leading the way, while financial  shares including JP Morgan, Citi, and Bank of America (BAC) were among the decliners. The S&P 500 and the NASDAQ both closed slightly lower after setting new 52-week highs on an intra-day basis.

Traders may be on the cautious side due to this week’s Federal Open Market Committee (FOMC) policy announcement. Though the Fed is not expected to raise interest rates, the recent strength of economic data has some committee members calling for a tightening of monetary policy. Changes to the language of its statement may be key in determining the timing of future increases in interest rates.

In other news, ongoing concerns about the Greek debt crisis sent the dollar higher resulting in lower oil prices. Additionally, crude supplies, which are anticipated to increase in this weeks inventory numbers, are pushing prices down to the $80 per barrel level, signaled by OPEC to be desirable. Gold, however, was able to increase by 30 cents, to $1154 per ounce, despite the rise in the dollar.

I never tire of reporting that our model portfolios continue to climb with our hedged portfolio closing Friday at $1,854,360 on its one year anniversary, representing an annual return of 85.43%. More outstanding is our unhedged account which closed at $2,138,713, a gain of over 113% in less that 10 months.

To learn the strategy that has produced these stellar returns, go to http://optionsprofitzone.com and download our e-book “Winning the Race to Financial Independence” or purchase the “Options Profit Zone Home Study Course”. You may also follow the links on the right hand side of this page.

Michael

Standing at the Crossroads

The major stock U.S. stock markets may have reached a crossroads after the Dow Jones Industrial Average posted another 1% decline last week, following its 4.1% downturn the previous week. The 3.5% loss for the month of January was the worst performance for the blue-chip index since February 2009 resulting in downside penetration of its 20-week moving average. My friends at Schaffer’s Investment Research revealed that the technical backdrop has weakened considerably noting that the S&P 500 Index has broken below its 80-day moving average for the first time since the March 2009 bottom. Additionally, “the SPX was pushed back violently after a few attempts to overcome its important 160-month moving average, which is situated in the 1,150 area and acted as support at the 2002-2003 market bottom. At present, the SPX has retreated about 6.5% from the peak highs observed a couple weeks ago. ”

Good news including Ford’s announcement of its first full-year profit since 2005, higher consumer confidence, and Apple’s new Ipad was not enough to offset higher than expected unemployment numbers, concern about slower growth in China and economic woes in Greece. January’s poor showing may not bode well for the rest of the year. Historical data seems to indicate that January sets the tone for the next 12 months. It will be interesting to see if the Dow can hold above the emotional 10,000 support level. If not, we could soon test the primary support at 9,000.

Marc Faber, famed contrarian investment analyst known as Dr. Doom, has recommended pulling your money out of stocks right now, predicting that the S&P 500 could fall as much as 20% to 920. He believes that stocks are expensive due to the absence of a meaningful economic recovery. ” With unemployment staying at a relatively high level and with the revenue being weak, I don’t think corporate profits will be that great in 2010,” Faber said. “Basically, the profits have been boosted by aggressive cost-cutting. The revenue side of corporations is weak.” Faber advised investors to buy U.S. stocks on March 9, 2009 when the S&P reached its lowest level since 1996.

The coming week’s calendar is busy right out of the gate starting with Monday’s economic data, which will include December’s personal income and spending, December’s construction spending and the January Institute for Supply Management manufacturing index. The day will also see earnings releases from Exxon (XOM). January’s auto sales and December’s pending home sales are due on Tuesday, along with earnings from BP plc (BP), United Parcel Services (UPS), Whirlpool (WHR), and News Corp (NWS). Wednesday will bring the January ADP employment report, the ISM services index, and weekly crude inventories. It will also be a big day for earnings with Comcast Corp. (CMCSA), Pfizer Inc. (PFE), Time Warner Inc. (TWX), Broadcom Corp. (BRCM), Cisco Systems Inc. (CSCO), Visa Inc. (V), and YUM! Brands Inc. (YUM) reporting. The fourth-quarter productivity report, and December’s factory orders are scheduled for Thursday with earnings reports from  Burger King Holdings Inc. (BKC), The Clorox Co. (CLX), Kellogg Co. (K), MasterCard Inc. (MA), and Sony Corp. (SNE). We’ll end the week with more corporate earnings and January’s unemployment rate, nonfarm payrolls, and December’s consumer credit report due on Friday.

The numbers for our managed portfolios are still being calculated, though I’m sure in light of the market’s performance we will have lost some ground. I expect that our hedged portfolio fared the best, as it should in the environment we are experiencing. I’ll post them when they are available. In the meantime, keep your eye on the volatility index (VIX) for clues as to the market’s conviction.

To quote Cream’s 1970’s rock standard…”I’m standing at the crossroads, believe I’m sinking down.”

Michael

Dow Hits 15 Month High

Stocks recovered nicely from Tuesday’s negative response to lower than expected earnings from Alcoa and Chevron’s warning of expected shortfalls with a 53 point climb to a new 15 month high. After a mid-morning sell-off the blue chip index turned sharply after investors considered the testimony of several top banking executives on Capital Hill which included the CEO’s of Goldman Sachs and JP Morgan. The Dowe topped the 10,700 market since September 2008. Merk led the pack after an upgrade by Credit Suisse who moved its target price from $35 to $47 per share. The S&P followed with a gain of 9.5 points to close at 1145 within reach of its 1157 resistence while the NASDAQ broke above its 10-day moving average closing at  2307. All eyes are on Intel’s earnings report on Thursday for clues as to the strength of the economic recovery.  A positive Intel number may be just what the Bulls need to move this market through near term resistence.

Crude oil dropped for the third consecutive day reversing a month-long uptrend after stockpiles of crude and gasoline grew by more than analysts predicted suggesting that consumer demand remains weak. Gold moved higher in response to a weaker dollar to close at $1136.80 per ounce, a gain of $7.40.

As promised, I am posting Friday’s closing values for our managed portfolios which came in at $1,452,645 and $1,602,701 for our hedged and unhedged portfolios.  This represented a gain of $12,448 and 24,659, respectively.

For more info go to http://optionsprofitzone.com.

Michael

Dow 10,000 One Year Later

It was just over one year ago that the Dow Jones Industrial Average broke below 10,000 on its way to a March low of 6626. Last week, seven months later, the Dow returned to the emotional 10,000 level, holding it for two days before disappointing earnings and economic news led to profit taking that left the Dow at 9995 by the close on Friday. Though closing on a negative note, the major indices remained in positive territory for the week. Earnings from Intel and JP Morgan were among the bright spots of the week, but a downgrade of Goldman Sachs and Bank of America’s failure to satisfy expectations led to concern that the market’s climb could be nearing its apex.

Though 10,000 is a nice round number for investors to key on, technical resistence appears to be closer to 10,500 on the Dow and 1121 for the S&P. With resistence in sight, more bad news on the earnings front could test the bull’s resolve in the coming week. Monday also begins a new five-week option expiration cycle. Historically, the first week of a long expiration cycle has been bearish due to hedging activity from market makers. There have been recent exceptions, however, so any positive earnings announcements may boost the markets to new highs.

Earnings from Apple and Texas Instruments start the week off Monday with numbers from Caterpillar, Dupont, UAL, Yahoo and Coca-cola due on Tuesday, along with September home starts and PPI reports. Other companies reporting later in the week include Boeing, Amgen, Merk, 3M, Microsoft and Wells Fargo. Jobless claims and leading economic indicators are due Thursday with existing home sales reported on Friday.

Our model portfolios continue to climb with our hedged variety coming in at $1,315,274 and the unhedged account topping $1,372,500.

 

Good Trading,
Michael

 

 

 

Houston, We Have a Catalyst

Monday’s ISM data wasn’t the only news for the week after all. The bulls found their catalyst with Australia’s 25 basis point interest rate hike, which helped to drive the U.S. dollar lower, in turn, lifting the Dow Jones into orbit with a new year-to-date high. The S&P 500 and the NASDAQ each posted 4.5% gains for the week. There was some concern early Friday as Fed Chairman Bernanke vowed to raise key interest rates and reduce stimulus efforts when the recovery in the U.S. economy becomes more pronounced. However, unexpected earnings  from Alcoa (AA) and the Commerce Departments report showing  narrowed trade defecit gave the market a late push adding to the weeks gains.

The week ahead brings another option expiration Friday. These weeks have had a positive bias in the past but often get started on a down beat. Be prepared for weakness on Monday but a rally during the week if we get better than expected earnings news. However, some are calling for the possibility of disappointing earnings when compared to the second quarter, which was buoyed by cost cutting efforts that may not be in place for the third quarter. Look for earnings from Johnson & Johnson, Intel and CSX on Tuesday, with J P Morgan, and Abbott Labs reporting on Wednesday. Citi, Goldman Sachs, Google and IBM will follow on Thursday with earnings from Bank of America, GE, and Halliburton due on Friday. Key economic reports including CPI and initial jobless claims will be released on Thursday followed by industrial production and capacity utilization on Friday.

Historically, good news from Alcoa, like we saw last week is followed up with more good news in the next few weeks. A break above the S&P resistence of 1080 could lead us to the 1120 range. Improving economic recovery has led to a rise in energy prices, in anticipation of rising demand. Still, I wouldn’t rest easy until after October is behind us.

Our model portfolios continue to soar with our hedged account closing at $1,311,790 and our newest portfolio coming at an astounding $1,361,408 a gain of almost $65,000.

Good Luck and Happy Trading,

Michael

More on Earnings and Guidance

Goldman Sachs blew away earnings estimates (as expected) and closed up $0.22, its highest close of the year. Though it’s higher in after-market trading, if it keeps with previous patterns, expect a modest decline in the coming sessions. INTC reported $0.18 eps today before charges, far above  estimates of $0.08. They also  gave guidance for Q3 revenues of $8.1 to $8.9 billion which agian exceeded consensus estimates of $7.81 to $7.97 billion. Shares were up in after-market trading. Correction: Google is scheduled to report earnings on Thursday.

The rally we’ve seen after the bearish pattern that developed last week could be setting the bulls up for a fall. Many are saying that the bearish signal has failed. But the market never does what the masses predict, so watch for a decline towards the end of the week. The bearish pattern is still intact and may be sneaking through the “green shoots” waiting for optimism to reach a crescendo before raising its ugly head. Don’t be caught off guard! At a minimum, raise your stops.

Michael

Goldman Sachs, Earnings and Option Expiration

After weak morning trading the market roared ahead with its best day in six weeks.  This was an unexpected swing after penetration of last weeks 8200 support level signaled a change of trend to the downside. The financials led the way after a respected analyst upgraded Goldman Sachs who is expected to report positive earnings tomorrow. There is reason for continued caution, though, due to the fact that other financials who have little correlation with Goldman also rallied on the news. Lack of follow through with good news of their own could unravel this short term enthusiasm. Additionally, Goldman has had a tendacy to move down after reporting good news, as investors follow the old adage “buy on rumour sell on fact”. Earnings reports due tomorrow include Intel and Google.

It is also noteworthy that options expire on Friday which may lead to more volatility towards the end of the week. We’ll have to wait to see what kind of follow through the market gives us to determine whether the trend is truly turnung down, as signaled last week. I believe the best we can hope for is to stay in this trading range below Dow 9000 for some time. Though unlikely, a penetration of 9000 to the upside would signal  a continuation of the upward trend.

Earnings, option expiration, and more economic uncertainty should make this week interesting to watch. I remain in a defensive mode, watching for a significant downturn.

Michael