Thursday, October 22, 2009

The Earnings Effect

So the market seems to be buoyed by the US dollar weakness and a handful of stocks reporting good earnings. However despite most companies (about 78% last I heard on CNBC) beating expectations most of them are trading at levels below where they were when they reported their "blow out". So stocks are being fattened up into earnings and right after earnings, and then they're being dumped. This is a sign of a severely weakened uptrend. It's probably the institutions and big shot Wall Streeters pushing up these stocks and then dumping them on the smaller guys and retail folks. This is very bearish of course. Afterall, if a stock can't sustain a rally more than a couple days after blasting away earnings then what's left for them to do to make their stock go up from here?

Observe the 4 stocks above that reported earnings in the timeframes I circled in red. Notice that all these stocks are currently trading beneath where they were when they reported their "blow out" earnings. Again, this short term pop then drop action for earnings seems to be market-wide. When you combine this with a weaker dollar every day, you get a puffed up stock market based on smoke and mirrors. This is not a healthy bull run, this is bear market rally-type action.

So that's a little insight as I see the market internally, as to what's really fueling the rally. It will turn lower; but the part that's proven very difficult the past few weeks is determining when. But there's no doubt in my mind that this major rally is in its last throws, and the more it rallies without a break, the harder and faster it's going to fall when it finally turns down.


Gustavo said...

I missed totally the boat!!!!

This is optimism what I have not!!

Leuthold Says S&P 500 May Advance to 1,350 Next Year (Zambomba!!!!!!)

By Mary Childs and Betty Liu

Oct. 22 (Bloomberg) -- The Standard & Poor’s 500 Index will rally through year-end and may rise to 1,350 in 2010 as profits improve, said Steve Leuthold, whose Leuthold Core Investment Fund beat 95 percent of rivals in the past five years.

The benchmark for American equity will advance in the year’s final two months as companies topping analysts’ profit estimates entice investors who haven’t owned stocks during their seven-month rally, Leuthold said. The measure may climb to 1,350 by the middle of next year, a 25 percent gain from yesterday’s close, before retreating in the second half, he said.

“We’re setting up for a really good market in November and December, a year-end rally where you’re getting a forced move into the market by those that have lagged behind,” Leuthold, who manages $4 billion, said in a Bloomberg Television interview. Stocks will benefit from “capitulation on the part of people who have been cautious,” he said.(Yeahhh!!!!!!!!!!!!:-))))

The S&P 500 is trading at its highest valuation in five years after climbing 60 percent from a 12-year low in March as the government lent, spent or guaranteed $11.6 trillion to combat the worst recession since the 1930s. The index is valued at more than 20 times the reported operating profits of its companies, twice its price-earnings ratio on March 6.

‘Getting Toward Overvalued’

“It’s not terribly overvalued, but we are getting toward overvalued territory,” Leuthold said. “There’s a limitation on how far this market can go on a valuation basis. We’ve got to wait a while before we’re going to go above 1,550 to new all- time highs.”(Jejeje!!!!It's not later to buy in this analysis.).

The index closed at 1,081.40 yesterday, 31 percent below its record of 1,565.15 on Oct. 9, 2007.

The measure will probably reach its 2010 high by mid-year and the market will have “trouble” in the second half should the government disappoint investors who are anticipating moves to reduce the nation’s fiscal deficit, he said.

Half of Leuthold’s portfolio is invested outside of the U.S., he said, focused on healthcare companies and those that benefit from increasing consumer spending in China. He also recommended American companies that sell their products abroad.

“We’re quite dependent on the faster economic growth outside the U.S.,” he said. “That’s where the action is going to be.”

Economic Expansion

China’s economy will expand 9.5 percent next year(Boooooommmm!!!), compared with 2.4 percent growth for the U.S., according to the average forecasts of economists surveyed by Bloomberg.

Leuthold said he missed part of the rally in large technology companies, which he sold earlier this year, and predicted mergers and acquisitions will increase after they report earnings that surpass analysts’ estimates.

Technology companies in the S&P 500 have led this year’s advance, climbing 49 percent, the most among 10 industries. Their third-quarter earnings have topped analysts’ projections by 14 percent, according to Bloomberg data.

Xerox Corp., the largest maker of high-speed color printers, today forecast profit for the year that beat projections. The company agreed to buy Affiliated Computer Services Inc. for $5.7 billion last month. Dell Inc., the second-largest personal-computer maker, agreed to purchase Perot Systems Corp. for $3.9 billion on Sept. 20.

Good article uh??? Buy, buy, buy...!

Todd S said...

Good catch. People have been selling stocks after posting great earnings and forecasts and many big stocks are trading lower than the pre-earnings announcements. So if the S&P gets to 1350 like this guy says, it's not going to be due to great earnings reports.

Thanks for the post!