A rally in the face of negative press is bullish. The optimism could be short lived, but the bullish momentum remains despite gloomy news reports.

With weak earnings from the banks and minimal economic data to embrace, I took a bearish position yesterday.

Under most circumstances, you should strive to condition yourself to seek out hated, cheap investments.

The idea may be a bit forward-looking, but it's not a difficult argument to make.

After Warren Buffett made his IBM (Nasdaq: IBM) purchase public this week, technology stocks have seen strong gains, with the big cap American technology stocks leading the charge.

The stress in Europe will not go away any time soon. Traders from Europe remain on high alert, and the market is likely to be just as volatile this week as it was last week.

Investors had expected the worst from the banks, which is why the financial index was down 30% since May. The market will not be able to break 1250 resistance and rally higher without the bank stocks.

Bank of America (NYSE: BAC) missed earnings estimates badly, and tech behemoth IBM (NYSE: IBM) came in light on sales.

Earnings season has been a success so far, with roughly 70% of the S&P 500 companies that have reported so far beating expectations.

Despite the threats that the EU debt crisis may spill over and affect U.S. GDP growth, economic data has come in pretty good lately.

The market was slammed yet another time yesterday. Although unlike Thursday and Friday, the indices recovered into the close.

Once again financials led the charge lower and the big banks like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) were down 3%. Energy and technology components were also hurt and stocks like Microsoft (NASDAQ:MSFT) and IBM (NYSE:IBM) were down 1% and Exxon Mobil (NYSE:XOM), Apache (NYSE:APA), Continental Resources (NYSE:CLR), which we're short, and Halliburton (NYSE:HAL) were down 2%.

The market slumped lower yesterday and the bulls lost their four day winning streak. Volume was low in the decline, as it has been for most of the week.

Financials were the big losers yesterday; bank stocks, including Bank of America (NYSE:BAC) JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) were all down more than 3%.

In 2008, we knew that the mortgage-backed securities depleted the cash reserves at banks to the point that they were insolvent. In January of 2010, it was the uncertainty of Greek sovereign debt along with other European countries that caused a very sharp pull back for stock prices.

But it's more difficult to find a culprit for the declines we've seen lately.

Yes, there have been weakening economic data, to the point that GDP growth may be below the 2% line. That's close enough to negative growth that some are throwing around the "r" word: recession.

The market ripped higher yesterday after a consolidation session on Wednesday. Volume was jacked as the indices overcame short term resistance areas and pushed up towards fresh highs.

The market had a lot going in its favor yesterday. First, second quarter earnings have been good thus far, and the market is still riding on the bullish sentiment following AAPL, GOOG, IBM and the rest of the great technology earnings reports by big companies. Second, the EU finally got its act together and formed a bailout package.

I’m finding it difficult to express my anger and frustration at our dysfunctional Congress. Their inability to get some kind of budget passed is appalling. And it’s costing us a good rally for stocks. The Dow Industrials would probably be 1,000 points higher if these children would simply do their job.

If they worked for me, they’d have been fired long ago…

It was an interesting day for earnings. IBM (NYSE:IBM), Wells Fargo (NYSE:WFC) and Coca-Cola (NYSE:KO) came in great. Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC), well, not so much.

Actually, Bank of America would have been pretty good, were it not for the $9+ billion the bank set aside for mortgage settlements.

It’s really necessary to pick and choose bank stocks. Some, like JP Morgan (NYSE:JPM) and Wells Fargo are doing well adjusting to new rules and dealing with mortgage issues.

The market pulled back hard yesterday. The selling was intense and financials led the indices lower after problems in Europe surfaced in the morning. Despite the 2% decline, all indices held their must hold support levels: SPX 1301, Nasdaq 2700 and Russell 800.

 The troubles in Europe resulted in a positive move for the dollar, which in turn resulted in a decline to industrial commodities. That downward selling pressure then bled into the other indices. The decline in the euro stemmed from insufficient stress testing in Europe, which increased the perception of contagion by the weak banks. Despite the fundamental concern surrounding the euro I have a long position in the unloved currency.

I took the long position on Friday, but held it through the pathetic emotional sell-off yesterday. I am looking for $1.44.

The market pulled back last week and volume started to creep back up. It was an options expiration week which typically will be a higher volume week. Despite the 2% decline, all indices held their must hold support levels: SPX 1301, Nasdaq 2700 and Russell 800.

 The bulls will need to protect those support levels through a barrage of data that is scheduled for this week. First, the U.S. debt ceiling talks will intensify as the deadline for default gets nearer. In fact, Treasury Secretary Tim Geithner was on CNBC talking the debt ceiling this morning. Additionally, U.S. earnings season hits full stride this week. Major blue chips like Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), GE (NYSE: GE), IBM (NYSE: IBM), Intel (Nasdaq: INTC) and McDonald's (NYSE: MCD) report second quarter earnings results this week. Along with the U.S. debt ceiling debate - and earnings results - will be the usual heap of economic data and the daily dose of European debt woes.

Nearly a month ago, after the last Fed meeting, we started to discuss the likelihood that the U.S. economic recovery was slowing down. After all, the Fed had just lowered its GDP forecast for 2011 and acknowledged that inflation was picking up as a result of QE2.

 

The S&P 500 was above 1,360 at the time.

If you look at "pretax, pre-provision profits", which excludes taxes, loan loss reserves and one-time items, profits fell 40% year over year. That's clearly not a good trend for the banks. So how did banks post such good "headline" profits? Loan loss reserves, as we have discussed. Banks have been aggressively moving loan loss reserves back to the asset side of the balance sheet. And that's accounted for the lion's share of 1Q earnings. It also leaves the banks less protected if the economy tanks again...

Corporate America kicked it up a notch last week. And the S&P 500 appears to be taking out resistance at 1,335.

Bloomberg reports that 71% of the 188 MSCI World Index companies that have reported Q1 earnings have beaten earnings. Earnings from this group of companies are beating expectations by 8.8%. And I’m sure when similar data is available for the S&P 500, we’ll see similar statistics.

Only 20 companies from the S&P 500 have reported earnings so far. 15 of them beaten expectations by 0.7%. The pace of reporting for S&P 500 companies picks up today.

Goldman Sachs (NYSE:GS) beat expectations this morning. After the bell today, we’ll hear from IBM (NYSE:IBM) and Intel (Nasdaq:INTC). Then, tomorrow, we get results from Apple (Nasdaq:AAPL).

The correction we’ve been monitoring certainly picked up some steam on Friday. The rioting in Egypt gave investors an easy excuse to drive stocks sharply lower. And there should be no surprise that tech stocks and the Nasdaq bore the brunt of the selling.

Tech stocks were strong momentum trades in the last couple of months of 2010 and the first weeks of 2011. Then earnings seasons started. I can’t say that earnings expectations were too high – many of the top tech stocks, like Apple (Nasdaq:AAPL), IBM (NYSE:IBM), Intel (Nasdaq:INTC) and Qualcomm (Nasdaq:QCOM) beat expectations and offered solid guidance going forward.

The bears' futile attempts to take stock prices lower have been good sport to watch. The first level of support on the S&P 500 is 1,280. The S&P 500 has closed above that level every day since January 12. That's 8 straight days.

Even last week, when it looked like a correction was looming -- after stocks sold-off on the good news from Apple (Nasdaq:AAPL) and IBM (NYSE:IBM) -- the S&P 500 fell all the way to 1,271. But it didn't close there.

Ever since the stock market sold off after IBM (NYSE:IBM) and Apple (Nasdaq:AAPL) last week, we’ve been on the lookout for signs that a correction for stock prices would pick up steam.

It’s not like the first couple days of selling took us by surprise, I’ve been warning that a correction could be coming for a few weeks now. And even though we have seen some sellers emerge in the market and take stock prices lower, the damage has been minimal and contained to a few sectors.

I said yesterday that it was tough to imagine Bank of America (NYSE:BAC) reporting good numbers this morning. And sure enough, Bank of America didn’t report good numbers.

In fact, BofA reported really bad numbers. At least that’s how I see a $1.4 billion quarterly loss. Apparently I’m in the minority, though, because BofA stock is up slightly this morning. But I think I can shed some light on why BofA isn’t getting hammered today.

I've been warning that a correction was coming for stock prices for a few weeks now. And no, I'm not trying to point out that I have any unique insight on this. It's just that when the stock market advances in a virtually straight line for 4 months, you start to think investors and traders will take some profits at some point.

Corrections are inevitable and healthy for stock prices, like a forest fire that clears out underbrush and old growth and let's new growth occur. OK, that may be a little dramatic, but you get the point.

So far this earnings season, we are seeing a clear separation between two of the stock markets leading sectors Starting with Intel (Nasdaq:INTC) and continuing with Apple (Nasdaq:AAPL) and IBM (NYSE:IBM), technology earnings were fantastic in the fourth quarter.

But it should be clear that banks are still grappling with the loss of mortgage business and the fallout from the financial crisis. And quite simply, while the climate for banks has certainly improved, as a group, they are not going to return to the growth they enjoyed in the last decade anytime soon.

We are certainly getting an interesting start to the week. Steve Jobs is taking a health-related leave of absence from Apple (Nasdaq:AAPL) and the shares are down around 5%. Apple stock traded down 8% yesterday in Europe, so there may be some more downside. Apple sold off around15% the last time Jobs took a leave of absence, so we may see Apple trade down to $300 a share.

Of course, Jobs' absence is unlikely to affect Apple's earnings, revenues and innovative products.

There’s no ignoring the European debt problems today. Real estate loan defaults are crippling a few Spanish banks, and the IMF has advised that Spain’s banking sector needs to consolidate quickly to provide a more solid backstop against defaults.   

 

If this reminds you of the scramble here in the U.S. to have weak financial institutions like Merrill Lynch and Countrywide be absorbed by stronger companies, it should.  

 

And we should also recall that while consolidation helped mitigate some of the potential effects of the financial crisis, it wasn’t a smooth road. Even the strong banks eventually required billion in bailout money to keep them afloat

I really, really don’t want to talk about the euro today. And I think I’ve made myself quite clear about oil prices. (In fact, I just recommended another top-notch Bakken oil producer to Energy World Profits readers last Thursday that should be good for a quick 30% gain as well as outstanding long-term growth. You can learn more HERE.)   

 

Today, there’s something else on my mind.   

 

As usual, there’s a wide range of debate over whether stocks are overpriced or not. The Wall Street Journal says that the price-to-earnings ratio for the S&P 500 is currently 19. Based on forward earnings estimates, it’s 14. Clearly, a p/e of 19 is above the historical average of approximately 16. And the forward p/e of 14 is below the historic average. It’s likely that the truth lies somewhere in the middle. I have no problem stating that stocks appear more or less fairly valued at the moment.  

On Monday, when it was apparent that we were in for a big day as futures went limit up in pre-market, I said I wanted to see a candlestick pattern called “three white soldiers.”  

 

Three white soldiers basically means three pretty good sized up days in a row. This pattern is considered very bullish, especially after a period of consolidation. And the reason it’s bullish is fairly easy to deduce. 

 

A period of consolidation for a stock means that not much is changing. The buyers and sellers are pretty much in agreement as to what it’s worth. And so the price doesn’t change much. 

April 18 (SmallCapInvestor.com) – The Russell 2000 stumbled, but the Dow closed at a new record high as news of strong results from the financial sector offset tech sector woes.  Among small caps, Avanir Pharmaceuticals (Nasdaq: AVNR) tripled on news of a successful drug trial, while shares of Intevac, Inc. (Nasdaq: IVAC) were downgraded.

The Russell 2000 lost for the second day, dropping 4.58 points, or 0.55 percent, to 824.38.  The Dow Jones Industrial Average set a new record close, adding 30.80 points, or 0.24 percent, to 12,803.84.  The previous record was 12,786.64, set on Feb.20.

April 18 (SmallCapInvestor.com) – Stocks are generally sagging this morning on disappointing news from tech sector giants Yahoo! and IBM.  Among small caps, shares of Millennium Cell Inc. (Nasdaq: MCEL) are up on news of a strategic partnership to develop hydrogen fuel cell technology, while videophone developer WorldGate Communications, Inc. (Nasdaq: WGAT) faces delisting.

At 10:38 AM the Russell 2000 was down 2.79 points, or 0.34 percent, to 826.17.  The Dow Jones Industrial Average had lost 13.74 points, or 0.11 percent, to 12,759.30.