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

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

Technical Analysis Lesson on Continuation Chart Patterns

It's about noon on Sunday here, and after enjoying a nice lunch I remembered that I need to post the next Traders' Whiteboard video for everyone.

This seventh video covers continuation patterns. A continuation patten is one that signals a continuation of, or a return to, the prevailing trend.

Like the other Trader's Whiteboard videos, this one is about six minutes long. If you missed any of the prior six videos, just look back through this month's blog posts and you'll find them.

Tomorrow's another trading day, so take a little time tonight to review your positions and assess your risk.

Trade well!

Christopher Smith
TheOptionClub.com

Market Trend Analayis and the Traders Whiteboard Cont....

Good morning! It's Saturday and I have a 9:00 a.m. appointment with a trainer. Ever since I turned 40 it's like the warranty expired. I used to cruise into the gym, lift a little weight, jump on a stair climber, and I was good to go. Now I pay some young in-shape guy to inflict pain on me, and still slowly lose the battle.

I feel a little like Friday's market...

Friday morning, we opened up. In fact, the NASDAQ gapped up and advanced 1% during the first hour. It just wasn't meant to be, though.

All of the major indexes closed lower for the day.


We're still in a rally, but this market needs to get some momentum going if its going to break out of its current bearish trend. I haven't seen that momentum yet, and today I'm feeling pretty good about that call premium I sold.

But, hey! The guys on CNBC were saying yesterday that the bottom is here... Did you notice that red trade triangle come in there Thursday on the S&P 500? Could this downward trend continue?

Look back on the posts a few days. I posted a chart with Fibonacci levels, and surmised that 1,170 was not out of the question. Yeah, we've got to be questioning whether the bottom is really here.

Don't get me wrong... I don't mean to be negative, but my money is on the line here so I do want to be realistic and pay attention to the probabilities. Just spend some time thinking about what it would mean for you if we go to 1,170 and have a plan in place if that happens...

I spend a lot of time emphasizing why we all need to have some form of trading and investing plan. If you listen to CNBC for your guidance, you'll be buying the wrong stuff and the wrong time. You need some thing more objective.

That's one very big reason why I'm a fan of Bill Poulos' new course. It's objective. It's rule based. It filters out all of the noise and just focuses on what's actually happening in the market, identifying a trend, finding a safe point of entry, and then applying an effective money management discipline. Check out the review of ETF Profit Driver if you need more info on that.

So, with the idea of making ourselves more disciplined, more sophisticated traders, it is time for our 6th Traders Whiteboard lesson.

Now, if you've missed any of these just scroll back through the blog posts and you'll find the prior five. Those videos are still up, and each of them is just a few minutes long.

In this 6th lesson, we get into the interplay between fundamental and technical analysis. The whole video is a little under 7 minutes in duration, but it touches upon a couple key concepts so it's time well spent.

Come back tomorrow and I'll have a seventh trading lesson for you...

Have a good weekend!

Christopher Smith
TheOptionClub.com

U.S. Consumers Spending Stagnant On Higher Income

This morning, data for U.S. consumer income was reported as a 0.5% rise. The market was expecting just 0.3% and a half point gain is the biggest gain seen for more than half a year.

On the other hand, personal consumption rose just 0.1% and once you factor in higher prices real spending was unchanged. This marks a clear cutback in spending in favor of savings, or more likely in favor of paying down debt. Question also whether this is an indication whether those stimulus checks in May will get spent with local retailers versus allocated to pay down additional debt or further fund the savings account.

At 10:00 a.m. EST today, we will get the University of Michigan Sentiment Index numbers. The market expects an end-of-month value of 69.5, as compared to a prior reading of 70.8.

The pre-market activity suggested a mildly higher open.

With the weekend now here, we'll pick up with our educational video series on technical analysis basics.

In this edition of the Traders Whiteboard we will be introduced to the concept of establishing a trading game plan.

Far too often I hear from traders who tell me that they are in a trade, but are not sure what to do next. In a perfect trading world. this question would never be asked because everyone of us would have a pre-established trade plan in place before we open the trade.

The whole video is just 5 minutes long. So, grab a cup of coffee and click on the the video image above to start it playing.

I'll be posting additional lessons over the weekend...

Trade well.

Christopher Smith
TheOptionClub.com

Why The S&P 500 May Be Heading For 1,170...

The markets cooled a bit yesterday, and this morning's pre-market activity has been pointing toward a soft opening. The question is whether the market is consolidating the recent gains before heading higher, or was this buying just a short-term recovery from over sold conditions and we're about to resume our downward trend.

To gain some perspective, I have two charts from the MarketClub service for us to review. They are both of the S&P 500, but one is a weekly chart while the other displays monthly bars.

I won't post the daily, but you can very easily pull that up yourself. We have a recent green trade triangle from the MarketClub service on that chart, as well as on the weekly chart (above). You could get long here, but you would want to maintain a tight stop.

What I want to point out on the weekly chart above is the red, down sloping trend line. We are still in a downward trend and have rallied off of a recent low. I might get more confident about calling a bottom if we test that low and see it hold.


This second chart is the monthly. You'll notice that our last major bottom was back in March '03, and that we enjoyed a significant rally off that bottom that carried us through December '07. That's a long run.

I have inserted Fibonacci retracement levels. You'll see that the first level has held, but we could very well see the market retrace to the 50% level at about 1,170 on the index. Notice that the monthly chart has not produced a green trade triangle and we are still operating under the red triangle generated back in January.

What does all of this mean?

It means that we've rallied off of recent lows, but we don't know if this rally will turn into a new bull market trend. We may very well return to the current bear market trend, or see the market consolidate. The point is we are at a point where we need to see what develops while being cognizant of the "big picture."

Calling a bottom right now and jumping in with all your capital is ill advised. If you want to get long, be judicious. A couple in-the-money call options may be a safer means of taking a long position than buying the underlying equity. You can always exercise your rights under the options to buy the stock or sell the appreciated calls to help finance that equity purchase. If this rally fails, you have less at risk.

More technical analysis lessons from the Traders' White Board series are coming as we get closer to the weekend, plus I hope to have my review of Bill Poulos' ETF Profit Trader posted.

So far, I'm impressed and believe that he has done another expertly fine job. Let's see if my opinion holds up as I finish working my way through. Take a look at yesterday's post if you would like to get some additional information.

Trade well!

Christopher Smith
TheOptionClub.com

How To Set Stop Losses Trading Video

Warren Buffet's number one rule of investing is "don't lose money." His number two rule? Don't forget rule number 1...

Today's video provides an extremely important lesson about not losing money.


Adam Hewison covers three methods of using stop losses in this video. If you're trading without stops, it's probably because you're unsure about how to use set your exit points.

Take about 7 minutes and watch this video, which will review three methods for selecting exit points. Incorporating this lesson into your trading could be one of the best things you could do for your financial success this year...

Trade well.

Christopher Smith
TheOptionClub.com

Trading Trends With Technical Analysis

It is Easter Sunday, and time for our third chart analysis video.



This installment focuses on simplifying your analysis. It touches upon basic trend analysis and then reviews some basic studies such as MACD, Stochastics, and other oscillators. The goal is not so much to pick tops and bottoms, but to identifying emerging trends and then jump on board for a significant portion of the move.

These "bite size" educational videos are a quick way to brush up on the fundamentals of technical analysis. So, grab your favorite beverage, take a few minutes, sit back and enjoy this short video.

Happy Easter!

Christopher Smith
TheOptionClub.com

Learning Technical Analysis Basics - Part 2

Yesterday, I posted the first in a series of videos that focus upon technical analysis fundamentals and techniques.

Today, I'm posting the second video in the series which will cover some chart patterns. These are high probability patterns, that you can start incorporating into your chart analysis today.



So, take a few minutes today and watch this short video. It is just a few minutes long, so at worse it's a review of the fundamentals we all need to know.

Trade well, and be sure to check back tomorrow as I'll have the third video in the series up for you.

Christopher Smith
TheOptionClub.com

Learning Technical Analysis - Traders' Whiteboard Series

The stock market is closed today in observance of Good Friday, but that doesn't mean that we can't work on improving our trading...

Starting today, I want to share a series of educational videos with you. Each video is part of the Traders' Whiteboard series, which covers some foundational aspects of technical analysis.


Even if you understand technical analysis fairly well, it never hurts to review the basics.

The markets are currently engaged in a consolidation, marked with a lot of volatility. No one can say, with any degree of certainty, where we are headed next.

These videos focus on identifying trends and patterns that can help you make sense out of what is going on and position yourself for future trends.

I'll follow up this weekend and post a couple more videos. There are several of them, so do check back.

Trade well!

Christopher Smith
TheOptionClub.com

Market Rally Or Short Covering?

Yesterday was another big day in the markets!

Don't get too eager to jump in with long positions, though. Look back several posts. We saw similar price gains about a week ago and I'll wager that a lot of folks jump in just to see the market reverse.

The image above is a daily price chart for the S&P 500 from the MarketClub service. You'll notice on the right hand side of the chart that there are two green arrows. Those are potential "buy" signals generated by the Market Club service, which were triggered by the large price moves last week and, again, yesterday.

The problem we have is that yesterday's gains were on low volume and may very well have been a lot of short covering following the carnage that followed in the wake of the Bear Stearns fiasco. If there is no new institutional money to push a rally to new heights, that rally is doomed to fail.

We could still see a rally, however. I'm just not sold on the idea that now is the time to jump in, despite our green Trade Triangle from MarketClub.

So, what's the deal with these green triangles if I'm not taking the trades?

Fair question. The triangles do no work in isolation. You need to evaluate the buy signals, and the sell signals, in the context of the overall trend.


This second price chart is a weekly chart of the S&P 500, and it clearly demonstrates a downward trend. Plus, the last trade signal generated was a "sell."

If you want to take high probability trades using MarketClub, you'll look at multiple time frames and select only those trades that demonstrate favorable conditions in each. We have a "sell" on the weekly chart and a "buy" on the daily. Those signals conflict and that reduces our odds of success considerably.

The pre-market conditions suggest a lower open today. Let's see how things play out from here...

Trade well, and please do mind your risk!

Christopher Smith
TheOptionClub.com

Bear Stearns Losses Were Avoidable

All of this volatility made for a nice time to sell some option premium. That's what I found myself doing after the morning rally failed.

Bear Stearns has certainly been the talk of Wall Street but is just the most recently casualty of the credit market fall-out.

The reality is that the warning signs on Bear Stearns were present for months. If you were paying attention, you could have avoided the pain of owning Bear Stearns stock by selling your shares, or by purchasing put options.

It was also quite possible to make money on the short side. If you have a few minutes, take time to watch a video presentation that shows you exactly what I'm talking about.

Analysis Of Bear Stearns Warning Signs

The analysis that forewarned of Bear Stearns tumble, is applicable to any other stock that you might trade. There are going to be more casualties before we see the next bull market, so take the time to watch.

Christopher Smith
TheOptionClub.com

Martket Club Trade Triangle Analysis

We're seeing a lot of red again, this morning. The market actually opened to the upside, but it did not take long for the mood to turn bearish. The DJIA has been down more than 200 points during the first half hour of trading, but has eased off of the morning low...

The above chart is a daily chart of the S&P 500, displaying intra-day data from this morning. You can see that we still have a green trade triangle, which is the active signal. Another thing to make note of is the downward slope of the moving averages, which suggests that the market is in a downward trend.

Now, to fully appreciate the overall trend, you'll want to look at a weekly chart. Nonetheless, the point here is to take a look at the prevailing market trend.

The trend is your friend, except at the end...

Remember that old adage, because it is very easy to see an entry signal like that green triangle and jump into a directional trade. I have been cautioning about doing so, suggesting that you wait for a follow through day to confirm a change in trend.

A "buy" signal in a down trending market is really much more a signal to cover your short positions, take the profits off the table, and wait to see what opportunity presents next. You might be more aggressive with your entry when it favors the trend.

Trade well...

Christopher Smith
TheOptionClub.com

Ben Bernanke And A Trade Triangle

Big day in the market today!

Just as I go on record anticipating some additional downside, Mr. Bernanke steps it to add liquidity to the financial markets. The Fed is now accepting the mortgage backed securities, that everyone has all but written-off as near worthless paper, as collateral. Yeah, the same paper that Citi and Merrill can't sell is now accepted by Ben Bernanke and company as collateral.

So, what's really going on here? Politically, a bail out of this mortgage mess is a tough sell. The public questions why individuals who over extended themselves and banks that made bad lending decisions should be bailed out on the taxpayer's dime. Seems like a reasonable question, and one that Congress is likely to have difficulty with if they try to legislate a solution.

Today's announcement is part of a scheme that shifts risk out of the private sector and onto the books of government entities. The Fed will likely wind up owning a lot of that worthless paper they take as collateral and there ain't no stopping it now. The upshot is that the market receive a shot of liquidity in the arm to help it through this credit crunch.


The chart above is of the S&P 500. As you can see from the oscillator, the broad market had been over sold and was due for a rally. I touched upon this in my last post, but my expectation was that we might get relief for a day or two before heading lower.

Today saw the DJIA power up over 400 points, which is something we have not seen since the market's bottom in March of 2003. The S&P made a similar move today.

You'll note that we have a green "trade triangle" following today's action. This is a bullish indicator from the MarketClub service, but because we've been trending down (pay attention to the slope of the moving averages) you may not want to bet heavily against the prevailing market trend. It is a good opportunity to close short positions, however.

We want to see a follow-through day as confirmation of a bottom having been reached. Until then, it is probably best to "keep your powder dry."

Trade well.

Christopher Smith
TheOptionClub.com

Filtering For Improved Portfolio Performance

Today, I have the third video in a three-video series about building an investment portfolio.

It covers a concept called "filtering." This is a technique that is not often discussed, but it can really help zero in on strong investment returns.

The concepts reviewed have application for the stock market, as well as the futures and foreign currency markets. There is no cost for the video and no need to register.

Filter Investments Video

Just click, view and enjoy...

Trade well!

Christopher Smith
TheOptionClub.com

Portfolio Diversification Explained

Let's talk a little bit about portfolio diversification.

Too often we find ourselves opening multiple positions within our portfolio, all of which tend to rise and fall with the stock market. When the market is safely trending upward, we feel confident and secure in the construction of our portfolio. However, a marker correction, such as that we are experiencing, can shake our confidence as we watch our account equity shrink with falling stock prices.

One of the concepts then we will want to incorporate into our financial planning is that of a portfolio diversification. This comes in many forms, but generally requires diversification among both markets and individual market sectors.

Portfolio Diversification Video

Utilize the link above to access a recent video on the subject of portfolio diversification. This video is the first in a series and I will follow-up with subsequent videos here on my blog.

Trade well!

Christopher Smith
TheOptionClub.com

Market Update for the Week Ending November 30, 2007

The best thing that we can say about this week is that we are off to our recent lows. Equities rallied on Friday morning, but gave up some of their early gains. The NASDAQ action closed lower for the day, producing a distribution day on increased volume.

However, the other major indices all closed higher. The recent buying has been fueled by growing expectations of a Fed rate cut. Yesterday, we also saw oil prices fall further from their highs. It is not all rosy out there, as we have continued concerns regarding the housing market and credit markets. Consumer confidence has been staggered. I have seen mention in a few places about possible recession.

All of this creates a great deal of uncertainty. There are some bright spots, with leading stocks showing some resiliency admits all the selling. When markets are trending the ability to pick strong stocks is not always necessary to make money, as most science will tend to rise with the overall market. These consolidations will typically batter the weaker companies, pushing stock prices lower.

You can take a look at leading companies such as Intuitive Surgic and Apple Inc., and you'll see how they have maintained an upward trend despite the recent correction. Paying attention to the trend in the stock's behavior, or that of an index, it's critically important if you hope to stay profitable during these difficult market transitions.

If you need some help assessing the trend of a particular security, I would encourage you to take advantage of of the complementary trend assessment service provided by the guys at Market Club. This free service also makes for nice second opinion before jumping in.

Trade well!

Christopher Smith
TheOptionClub.com

Analysis Of Market Trends During A Correction

Well, we had nice update in the market yesterday. Today, the markets are on another upward tear.

Looking at the charts, this market remains dramatically oversold. It is not surprising that we are seeing some significant buying at this point in time. The markets have sold off more than 10% during this most recent correction. It is during such corrections that investors are likely to step in and add to their long term equity holdings.

If you are long-term investor, you made very well be part of the buying. For those with a shorter term perspective, you will want to be somewhat cautious because it is not clear that the correction is over. There remains a significant concern that the US economy is on the verge of recession.

If you are considering "getting along" in a particular stock or index product, remember the old saying "the trend is your friend, except at the end." It may be prudent to perform some analysis of the current trend. Obviously, this can be done utilizing any stock charting or technical analysis platform that you may choose.

For those who are less confident in their own abilities, you might consider taking advantage of a complimentary service. Just type in a ticker symbol and your e-mail address, and INO.com will e-mail their trend analysis to you.

Complementary INO.com Trend Analysis

Keeping your eye on the trend will significantly improve your odds of success. Even with the current correction in play, the stronger stocks will exhibit and maintain upward trending characteristics. Weaker candidates are likely showing telltale signs that any bullish run they have experienced is now over.

Corrections are difficult to deal with for the average investor in trader. However, for those who understand how the markets operate there are opportunities for significant profitability. So, be cautious but keep your eyes open for those opportunities that present themselves.

Trade well!

Christopher Smith
TheOptionClub.com