TradeMaster Jason Cimpl does it again

I expect the recent volatility is on readers’ minds, so let’s get right to TradeMaster‘s Jason Cimpl and his outlook:

The bulls did not capitalize on Friday’s bullish close yesterday. Stocks were up strongly in the morning with most indices up more than half a percent. Those gains held into the afternoon and it seemed as though we were going to see a nice pop into the close. Then around three, the market started to turn red and indices sold off hard in the last hour of the day. But it is not over for the bulls.

Despite the weak afternoon, the SPX managed to close above 1065 support. Resistance was formidable at 1071, which is the price we will be watching for a break out today in a short squeeze.

Short interest picked up substantially. We closed down most of our shorts already (including one with a sweet 15% profit . Basically, the market is oversold and any pop up will be fast. We held onto most of our longs anticipating a move higher, possibly back up to 1120, but we will be selling into any rally.

It’s important to remember that the vast majority of stock trading volume comes from institutional investors like mutual funds, hedge funds, and even sovereign investment funds.

As Jason notes, stocks rolled over yesterday afternoon. That’s consistent with institutional trading, which tends to take place during the first and last hour of the trading day.

It’s also important to remember that institutional selling isn’t necessarily an indication of economic or earnings data. Part of the reason stock prices hit such lows last March was that banks and other investors had to raise cash at all costs. And that can mean selling assets, regardless of one’s outlook.

A similar situation may be happening right now. Greece (especially) and other European countries have debt problems. No doubt some of the selling activity we’ve seen lately is related to this. Investors are hopeful that a solution for Greece’s debt problems is on the horizon. That’s helping today’s upside bias. That hope is also boosting the euro against the U.S. dollar which is good for stocks and commodities.

Also, don’t dismiss the government’s new-found focus on employment. We’ve already started to see what may be a trend change for employment. Jobs are the missing link to the economic recovery. Good news on this front will certainly help stocks move higher.

The Forecast for 2010: Looks Like Volatility

Wow. Two strong rallies to kick off
February. It’s great to see some buying interest after January’s
sell-off. But I would caution that 2010 will be more volatile than the
final 9 months of 2009, when stocks were on a one-way trip higher.

You
could argue that stocks are overvalued based on index P/E levels. The
trailing P/E for the S&P 500 is 21. At the same time, companies are
once again beating earnings estimates. Business is better than analysts
expected.

The forward P/E for the S&P 500 is 14. That’s based
on analysts’ expectations of 2010 earnings. If analysts are once again
low-balling the numbers, then the S&P 500 may actually be cheap.
But if unemployment continues to weaken, or if banks don’t loosen up
lending, or if the housing market doesn’t improve, then perhaps stocks
are expensive.

And so, stock prices will very likely be more
volatile this year. That means it’s going to be even more important to
do good research and buy quality stocks at reasonable valuations. It’s
also going to be critical for investors to focus on the sectors that
will outperform this year. Of course, all of this will be part of our
ongoing conversation here in Daily Profit.

When You Hear Hoof Beats…

It sure was nice to see stocks make a nice
move higher yesterday. Especially after I came out yesterday and said
Dow 10,000 and S&P 500 1,071 were support points.

It’s also
interesting that this advance came on the first day of February. Recall
that the positive GDP surprise came on Friday, the last trading day of
January. Investors were not interested in buying stocks in January. But
now that it’s February, the buyers are back.

It might seem
strange, but mutual funds and other institutional investors don’t base
their buy and sell decisions solely on making money. They have to play
the percentages. And that sometimes means taking profits when the
economic data supports better earnings and higher stock prices.

Is
that what took stocks lower in January? Maybe, although it’s a little
too soon to say the upside trend has been re-established. But
sometimes, when you hear hoof-beats, it’s best to think horses not
zebras.

The financial media has a
tendency to think zebras. The writers always want to find the reason
behind the selling. It’s China, maybe it is earnings, or is it economic
data? The list goes on. Of course, I’m not saying that these items
aren’t factors. But at the end of the day, it is institutional
investors that drive market direction. And like I said, they will take
profits sometimes, just because they can.

Low Rates to Continue

I managed to catch part of Treasury Secretary Geithner’s
testimony yesterday. I actually thought he represented himself pretty
well. I can appreciate his stance that AIG really was to big to fail.
But that notion that the New York Fed had to make sure all of AIG’s
credit default swaps were paid still doesn’t make sense.

Geithner’s explanation was that if AIG did pay off debts like
the $25 billion that went to Goldman, AIG would get downgraded and it
would become more expensive to unwind the company. Maybe I’m wrong, and
I haven’t checked to be sure, but I’m pretty sure AIG’s debt was
downgraded. And do you even need a rating for a company that’s 80%
owned by the government?

Bottom line: I still think former Treasury Secretary Paulson
made sure Goldman Sachs got paid and it really stinks that tax payers
get taken advantage of like that. Unfortunately, it’s unlikely anything
will come of it.

*****The Fed reiterated its pledge to keep
interest rates low for an extended period. No surprise there, but
investors liked the news. Stocks finished the day with a nice rally.

Still, it’s not like the Fed is keeping the liquidity spigots
wide open. The Fed plans to end its mortgage-backed securities
purchases. With so many stimulative monetary policies in place, low
interest rates will probably be the last thing to get changed.

*****China
is also d oing its part to soothe investors. According to Bloomberg,
China’s banking regulator has told lenders to "….step up scrutiny of
property loans while pledging to satisfy "reasonable" financing
needs…"

Watch ‘Em Squirm

I plan to be unavailable for a few hours, starting around 10 a.m.
this morning. I want to hear the members of the New York Fed try and
defend their actions regarding the AIG (NYSE: AIG) bailouts in front of Congress.

The New York Tines published
some of the prepared testimony of the principal players. I try to keep
a level head, but I’m reaching for my pitchfork and torch right now.

*****Recall
that the New York Fed orchestrated what ultimately became an $85
billion bailout. A good portion of that cash was paid directly to other
companies with which AIG had entered into the now famous credit default
swaps. These were essentially insurance contracts on mortgage backed
securities held by banks and underwritten by AIG.

A full $25 billion in AIG bailout money went to pay off Goldman Sachs (NYSE: GS). Here’s a section from the New York Times (Mr. Baxter s the general counsel for the NY Fed):  

Mr.
Baxter explained that the New York Fed felt compelled to pay out
A.I.G.’s counterparties in full to unwind tens of billions of dollars
in derivative contracts because "there was little time, and substantial
execution risk and attendant harm of not getting the deal done by the
deadline of Nov. 10." That was the date when A.I.G. was scheduled to
report its earnings and could face downgrades from credit ratings
agencies. A downgrade would have led to more collateral calls and even
greater liquidity problems for A.I.G., Mr. Baxter said.

Today is the Day

On the surface, earnings from IBM (NYSE: IBM) appeared excellent. The technology bellweather posted $3.59 a share in 4th Quarter earnings. That beat analysts’ expectations of $3.47 a share. IBM also beat slightly on revenues.
IBM also said 1st quarter revenues would be higher and even went so far as to raise earnings estimates for all of 2010. So why is the stock down?
Because IBM’s business services division, which includes consulting, reported a 2.8% drop in revenues. Obviously, strength in other divisions more than made up for it. But investors seem fixated on the negative.
Yes, the drumbeat of the skeptics rolls on…

Earnings Season

I heard there’s a new slogan making the rounds in corporate accounting departments. "Flat is the new up." I have to admit, that got a chuckle out of me. But it’s true, flat really is the new up when it comes to sales volume, revenues, and even earnings to an extent.
And that maxim will be put to the test next week as we head into earnings season for the Fourth Quarter of 2009.
It’s the weirdest thing, but I’m always a little surprised by Q4 earnings. It just seems to sneak up as I’m easing back into full work mode right after the holiday season. I don’t think I’m alone here either, because I haven’t seen any mention of Q4 earnings in the media.
OK, that’s not exactly true. Meredith Whitney did offer up an earnings estimate cut for Goldman Sachs (NYSE:GS) earlier in the week. Ever since Whitney started her own firm, she’s seemed a bit more eager to make a splash in the headlines. I imagine her as a task master in her office: punctual, driven, strict, and humorless. Kind of like Dwight from The Office (yes, I catch that show on occasion).
*****Still, Whitney’s is the first recognition that earnings season starts with Alcoa (NYSE:AA) on Monday. It should also be noted that the market ignored Whitney’s Goldman earnings cut (the parallels with Dwight continue). Truly, flat is the new up.
Of course, investors will be looking for earnings growth. But I suspect if revenues come in flat and companies can give a somewhat encouraging outlook for 2010, stocks will hold current valuation, and may even move higher…
 

Goldman Blows Out Earnings: Numbers vs. Actions

"Given the challenging fundamental backdrop in the global economy, we continue to be cautious about the near-term outlook for our businesses …" 
That’s what Goldman Sachs CFO had to say after it posted pretty good earnings numbers on Monday. Of course, no one in the banking sector in his or her right mind is going to say things are great. But numbers are one thing, actions are another.

Earning Season Starts with AA, BBBY, and CVX

Time flies. Seems like earnings season just ended and yet here we are again. But first-quarter earnings kick off tomorrow with Alcoa (NYSE:AA). 
Given how far the stock market has come over the last three weeks, you might think stock prices are set up for a fall as the reality of earnings dashes the enthusiasm that economic recovery is at hand.

HOV and GHM still in the green

Unemployment numbers continue to rise, but investors are more focused on the hope that the economy has bottomed and may be positioning for recovery. At least for now. 
Please note that I said "positioning for recovery." Mortgage rates are down and that seems to be helping the housing market a little. Credit afforded by the Treasury aimed at removing toxic assets from banks is resulting in higher valuations for those banks.