Poor Corporate Profits And Inflation

A little more than half of all companies in the S&P 500 have now reported Q1 earnings. Outside of financials and home builders, profits are actually growing at decent clip. All in all, its not a very good earnings season but in comparison to last quarter it is a definite improvement.



Financials continue to be the main drag, with first-quarter profit falling 70%. Compare that to the fourth when they suffered an outright loss. Consumer discretionary profits also are down due to builders and other housing-related companies.

Excluding financials, S&P 500 profits are expected to rise 8.6%. Energy firms, riding record prices, should deliver 29% growth. Tech profits are rising 9%, easily eclipsing analyst forecasts.

Much of the earnings growth in the large cap index is coming from multi-national companies like Caterpillar (CAT) IBM, and McDonalds (MCD), which are benefiting from overseas sales growth due to the weak dollar.

The market has been firming, pushing prices on the major indices higher. The chart I've posted today is of the S&P 500, and you'll see that as of Friday's close we're now pushing up against the downward trend line.

This is crunch time for the market. Do we break through the trend line and start carving higher highs and higher lows, or do stock prices fall back and continue along the slope of this bearish trend line?

Obviously, only time will tell. I have been adding some positive deltas to my portfolio, however. Much of that is in response to an increase in negative deltas due to the market's push higher.

I've been cautious about selling too much put premium, for fear of a reversal. What I've opted for is to add some long call options, which in turn I've hedged. This "one foot in and on foot out" approach is due to the continuing uncertainty as to where we are headed.

The general consensus seems to be that our second half will see growth. However, with inflation now a real concern it is unlikely that we'll see much more than a quarter point rate cut from the Fed. Mr. Bernanke and company will need to shift their attention from concerns about recession to inflation.

This summer you can expect to see gasoline prices push into the $4 to $5 per gallon territory. We could still see growth in the second half, I'd just be cautious about over committing myself.

Christopher Smith
TheOptionClub.com

Evaluating GE Earnings And Friday's Stock Market Sell Off

General Electric released first quarter results on Friday, missing analysts' projections and it slashed its second quarter and full-year profit forecasts. This sent the broad market averages skidding on Friday, with the S&P 500 and DJIA both losing 2% and the NASDAQ surrendering 2.6%.


The chart I'm posting is a daily hart of the S&P 500, which demonstrates a red sell signal a couple days prior to Friday's selling. Consequently, I saw little damage to my portfolio. In fact, I benefited from the selling.

There is something worth paying attention to in Friday's action. First, let's look closer at GE's troubles. Most of the company's losses came from its financial services business. This renewed fears that there is still more pain out there for the financial stocks.


Second, all that selling came on reduced volume. This represents a divergence in the market, where the strength of the market was not behind the day's move. Keep this in mind as we watch events unfold over the next several days. This market may still get its feet underneath it and resume that push to carve out a higher high.

Keep you risk in mind and trade well...

Christopher Smith
TheOptionClub.com

Alan Greenspan Says Recession Is Here

Alan Greenspan has gone on record, offering his opinion that the U.S. economy is now in a recession. Boeing just announced further delays in the development of its new 787 Dreamliner. Oil and gasoline prices are pushing higher. American Airlines has canceled over 800 flights, on the heels of having canceled 500 flights just yesterday.

There is plenty of bad news out there, but how is the market responding to it?



Above is a daily chart of the S&P 500. We have recently found a bottom around 1,275, off of which we have recently rallied.

With all of the bad news, one might expect to see the market selling off hard especially in light of the pronouncement by our former Fed chief that the economy is in recession. Yet, doesn't look all that bad on Wall Street this morning.

Many have suggested that the worse case scenarios have already been priced into the market and that it is in the process of bottoming. That may be the case, but only time will tell.

Looking at the chart, you should pay attention to the trend line. It extends back to the fourth quarter of last year, when our bull market was blowing off the last of its steam. Since that time, we have failed to make a new high and the downward sloping trend line remains in tact.

Nonetheless, we have pushed through the 50-day moving average. However, it seems that our latest rally is losing momentum before reaching 1,390, our prior swing high.

The battle, as I see it, is between those who think we may have bottomed but do not want to jump into the market in case they are wrong versus the bears looking to again short this market but don't want to get short just before it busts through resistance.

We've got a stand off!

My sense is that if earnings show some evidence of resilience, the market will interpret that as a sign that things are not that bad and that we will likely see the economy firm up and return to a growth mode in the second half. In that case, expect to see capital return to the market.

The bad news is out, the market is not responding to it, and this is now all about the ability of corporate America to grow earnings. Someone is going to blink here. It may be the bulls. It could well be the bears. Whatever the case, we should pay attention to earnings on the fundamental side of the equation, price and volume on the technical side, and watch as this show down plays out.

Christopher Smith
TheOptionClub.com

Is A Recession Priced Into Stock Market?

Let's look back over Friday's activity before the markets open for today.

We had a very weak jobs report on Friday, but the market was not overly phased. Selling did take hold after news that the credit rating on bond insurer MBIA was being cut from AAA to AA. Friday saw a mixed close, on reduced volume.

The news that the employers had shed 80,000 jobs in March, quite a few more than expected, and that unemployment had jumped from 4.8% to 5.1%, the highest reading since September 2005, has fueled expectations and fears that the economy is indeed headed for, if not already in, a recession.

This morning's pre-market suggests a higher open, however. Last Tuesday we saw a nice upsurge with all of the major indexes notching gains of 3% or more. Why the bullish enthusiasm?

Bear market rallies tend to give up their gains quickly, but so far the market has been stubbornly holding onto them. Some market experts are arguing that recession and poor economic news is already priced into the market. It is true that the market is a forward looking creature.

If the market has priced in the likelihood of a recession and we are seeing buying based upon an anticipated turn around, then the market is predicting a short, shallow recession. As retail traders and investors, it is a bit expensive to fund our predictions with large commitments of capital. So, be cautious and make sure you have a plan to protect against a potential downward slide if you choose to get long at this point in time.

Let's see what the market has in store for us this week...

Christopher Smith
TheOptionClub.com

March Jobs Report Adds To Recession Concerns

The March jobs report came in this morning, and marked a third-straight drop in U.S. payrolls. This data further confirms recession warnings from many, including the Federal Reserve Chairman Ben Bernanke.

About 80, 000 jobs were lost last month. That's 80,000 fewer people working and earning money, than there were in February. Both January and February saw a loss of about 75,000 jobs. That's a total of loss of 230,000 in the first quarter of the year.

So, unemployment is now 5.1% and there is additional reason to fear a recession. The Federal Reserve will likely want to cut rates further, but they are running out of room there.

Yet, the stock market did not seem to care this morning. Since opening slightly higher, the major indexes have declined slight and are currently mixed. The DJIA and Russell 2000 are slight in the red. The S&P 500 and NASDAQ 100 are marginally higher.

It's going to be difficult to fuel a sustained rally if companies are not growing their earnings. That's the driver of higher stock prices. Fundamentals do not always control in the short-term, but they do eventually assert themselves at the "big picture" level.

I remain long term bearish, but throttled back a bit on my negative deltas as this (what I believe to be) bear market rally broke out.

Keep an eye on your risk, too.

Trade well.

Christopher Smith
TheOptionClub.com

Do Your Mutual Funds Suck Right Now?

This post is intended for those of us with IRA accounts who are looking for safe, reliable methods of investing our retirement dollars and grow that wealth. Mutual funds have traditionally been the first choice of many financial advisers, but that is rapidly changing.

A growing number of advisers are switching from expensive, fee laden funds to other more flexible financial products. These products are Exchange Traded Funds, which offer the safety of diversity, just like mutual funds, but offer many other benefits.

Take a few minutes right now to learn more about why mutual funds may be hurting you, especially with this year's market, and why you may very well experience quite different results by using a different financial product and by adopting a well conceived financial game plan.

Look...

We had a nice little rally in the market yesterday. It is quite possible that we'll see some additional upside for the next several days. The smart money says this is a "bear market rally," meaning that we'll run for a bit and then head lower.

Mutual fund investors may breath a sigh of relief over the next day, or several days, but if (when) we do head lower their funds will likely head lower too. That bear market rally did them absolutely no good!

There is a better way, though. We know that in every market someone is making money. It just hasn't been you...at least not yet, anyway.

Click on the image above and the video will start up automatically, without need to register or take any further action. Just click, sit back, and learn...

Christopher Smith
TheOptionClub.com

Big Stock Market Gains On Fool's Day...

The stock market saw healthy gains yesterday. It was April Fool's day, though!

This morning, the pre-market looks like we may see a gap up. With Ben Bernanke scheduled to speak at 9:30 a.m. EST, it could be an interesting morning depending on what he says.

So, where are we?
We've go another green Trade Triangle on the daily chart. Recall that the weekly chart had been showing a green Trade Triangle. Ideally, we want these indicators consistent on multiple time frames.

On the daily chart, we bottomed out back in mid-March and I've been looking for a re-test of those lows around 1,275. The market seemed to be setting for that re-test, but yesterday's rally pushed through the recent swing high at 1,350.

I may want to start smoothing out my deltas, getting a bit more neutral. I've been maintaining a negative delta in light of the chronically weak market. Depending on how we follow up here I may be inclined to start reducing the negative bias and begin adding additional positive deltas.

One big day does not make for a rally, though.

Christopher Smith
TheOptionClub.com