Is the Market Bulletproof?

If the stock market has you scratching your head, don’t worry. You’re not alone. 

 

I’ve been half-jokingly calling the stock market “bulletproof” for the last couple of weeks. And it’s because stock prices just keep marching higher. It’s like there’s no bad news that could possibly bring it down.   

 

Last week, we had a volcano eruption that grounded European flights and cost those airlines at least $2 billion. Then Goldman Sachs was accused of fraud by the SEC, which makes a financial reform bill that could affect the entire banking industry’s profits, and the net result for stock was a one-day decline.   

Designed to Fail

I’m sure by now you’ve heard that Goldman Sachs (NYSE:GS) has been indicted for fraud. Goldman is accused of creating securities that were designed to fail, so it and its hedge fund cronies could make billions in profits.   

 

Case in point: Abacus 2007-AC1. “Abacus” was a 23-part series of “synthetic collateralized debt obligations” that Goldman Sachs constructed and sold to supposedly sophisticated investors.   

 

According to Bloomberg, a “synthetic collateralized debt obligations” was a mixture of “…credit- default swaps (CDO), used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities.”

Simon vs. General Growth

Today, I start by offering my condolences. It’s tax day, never a pleasant time of the year.  

 

Yesterday, I noted that the recent rally lacked enthusiasm. Low volume and small daily gains were the hallmarks. Did all that change yesterday after Intel (Nasdaq:INTC) posted blowout numbers?  

 

Maybe. Volume posted its best totals since February. And the S&P 500 made its biggest gain since March 5. 

No Doubt About Intel

Yesterday I gave a somewhat tongue in cheek treatment to the question of whether Alcoa (NYSE:AA) had beaten analysts’ earnings expectations or not.   

 

Intel (Nasdaq:INTC) left no room for doubt. The chip-maker crushed estimates by $0.05 a share, beat on revenues and profit margins and guided higher for the second quarter.   

 

What’s next for Intel? Fixing the housing problem? 

Alcoa: Meet, Miss or Beat?

There are some investors who think the significance of aluminum company Alcoa’s earnings is overblown. There are stocks that provide a better measure of consumer spending habits, or otherwise give more insight into the economy’s health.  

 

But because Alcoa is always the first major company to report, it’s numbers are still treated like an omen for the 499 companies on the S&P 500.  

 

So, if you ignore one-time charges, Alcoa (NYSE:AA) reported $0.10 a share 1st Quarter profit yesterday afternoon. I would swear I read on Yahoo! Finance that analysts were expecting $0.11 a share. That would mean Alcoa missed estimates.

Bullet-Proof

The stock market rally that started on February 5th, 2010 appears to be absolutely unstoppable. Bullet-proof. However you want to say it, there seems to be very little downside to stock prices, even after a strong rally.   

 

Now, we are not surprised. I’ve been relentlessly bullish here in Daily Profit. Sure, I may point out some discrepancies once in a while, maybe even shoot a few holes in the financial media’s neat and tidy explanations, but I’ve had us focused on upside targets for a year now, and there’s one main reason: earnings.   

 

This time last year, it was brutally obvious that analysts were seriously underestimating the earnings potential for bank stocks, even after the government changed the accounting rules to encourage profitability.   

 

And in subsequent months, analysts continued to lowball earnings estimates. Companies kept beating them, and the market kept rallying.   

50% Off

That was quite a show Maguire Properties (NYSE:MPG) put on yesterday after it reported 4th quarter earnings. It opened down, around $2.50 a share, and then marched steadily higher for the rest of the day to close at $3.54.   

 

Maguire’s cash reserves are rising after it walked away from a few underwater properties and sold a couple others. Investors seem to be saying the stock is on more solid ground now – volume was monstrous.  

 

While I’d love for Daily Profit readers to have participated in yesterday’s gains, I stand by my recommendation to take your profits on the stock before earnings. Earnings are a big uncertainty. Maguire could just as easily have dropped yesterday. There’s always risk when investing, and perhaps more so with a stock like Maguire. It would have been irresponsible of me not to have you take profits before earnings. 

Health Bill Profit Opportunity

Yesterday morning was the bears’ big chance. Futures were down, resistance at S&P 500 1,165 had held and there was a steady stream of seemingly negative news. Greece was still a question mark, trade relations between the U.S. and China was getting tense, and the controversial health care bill had just passed. There was enough uncertainty in the air to drive the S&P 500 to an early test of support at 1,150.   

 

That was the moment. 1,150. And the sellers couldn’t take it lower. In fact, the bulls took control and pushed the S&P 500 back above 1,165. As I wrote last week, there is very little resistance between 1,165 and 1,200. I think the odds are good that we see S&P 500 1,200 in the near future.   

 

Now, I want to switch gears and discuss the Nasdaq a little, because it’s been outperforming the other major indices by a wide margin. The S&P 500 is up 2.8% for the year. The Nasdaq, on the other hand, is up 4.3%. 

New Highs Coming?

Today is March options expiration, so don’t expect a lot of action. Options expiration days (the third Friday of the month) tend to be pretty dull.  

 

Still, it’s been a pretty good week for stocks. The S&P 500 moved up through two important resistance points – 1,150 and 1,165. 1,165 is a post-crisis high. And if you check a chart, you have to go back to late-2005 to find the next resistance point at 1,200. (The S&P 500 attempted to find support at 1,200 during the crash in 2008, but I don’t see that as particularly significant – investors were literally grasping at straws then.)  

 

Ironically, individual investors aren’t on board. Total inflows into diversified equity funds for U.S. stocks were negative in February. Bond funds and foreign funds showed gains.  

 

Also, ETFs had a positive inflow of $5 billion. That suggests that investors may be taking matters into their own hands and opting for a lower cost investment vehicle. 

Happy St. Patrick’s Day

Happy St. Patrick’s Day! In honor of the holiday, the stock market is in the green. The Fed reiterated its pledge to keep interest rates low for an extended time. The promise of cheap money is clearly helping to support stock valuations.

Also helping move prices higher, and supporting the Fed’s stance, is the 0.6% drop in the Producer Price Index. The drop was led by food and fuel prices. Excluding those, the so-called "core" rate climbed 0.1%.

You wouldn’t know fuel prices were lower looking at the price for a barrel of oil. Despite the relative strength of the U.S. dollar, oil has staged a month long rally that’s got it within spitting distance of its 52-week highs. And I expect we’ll be seeing those highs in the very near future.