Expect Nervous Trading Into Next Week. Line Up Strong Stocks For Put Credit Spreads!

October 27, 2009

Earnings continue to pour in and they have been positive. Over 80% of the companies that are reported have exceeded expectations.

Yesterday, the market started off on a positive note. A stronger than expected GDP release in South Korea sparked buying in Asia. That spilled over into other markets. After a brief rally, our market reversed sharply and it closed lower for the day. In the chart below, you can see that we have fallen below the breakout from two weeks ago. The price action the last few days has been bearish.

Overnight earnings were decent, but that was already priced into the market. BIDU fell 20% and that is weighing on tech stocks. Steel producers beat their numbers. Their cautious Q4 outlook has raised concerns and most the stocks are trading lower after releasing earnings.

Before tomorrow’s open, we will hear from reinsurance, education, REITs, and industrials. Reinsurers will post great numbers. Their investments have recovered and hurricane season has been very light. Education companies will also post huge earnings, but student loan defaults could weigh on share prices. REITs should also post good results and they might actually rally since they are priced for disaster. Many analysts believe that this is the second shoe to drop in this economic cycle and as time passes that fear will subside. The industrials have rallied with the market and most are trading lower after posting results. In aggregate, I believe the market will be a little soft.

Profit-taking has set in and Asset Managers have pulled their bids. They will not aggressively buy stocks until they see bona-fide support. I believe we will drift down and test SPY 104. That level represents the 50-day moving average and a three-month uptrend line. Overall, earnings have been great and revenues are creeping higher due to easy comps. The most bullish time of the year is approaching and I don’t envision a selloff when earnings are improving and interest rates are at record lows.

The Case-Schiller home price index came in better than expected and it helped to offset a worse than expected consumer confidence number. Tomorrow, durable goods orders will be released. The number is so volatile month-to-month that I dare not guess which way it will come out. Last month, it dropped 2.4% and that was worse than expected. Consensus estimates are looking for a 1% increase. New home sales will also be released and any uptick would be positive for the market. These numbers could easily be a wash and I believe the biggest economic release will be GDP on Thursday.

This is good time to line up strong stocks with good earnings. I liked the selloff this morning and the strong bounce. It tells me that buyers are willing to put money to work at this level. Tech, energy and retail look strong. This nervousness should last into next week. Once we get past the Unemployment Report in 10 days, we should be poised to rally.
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