Investment Tips

Is It Time?

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Good morning. As you are no doubt aware, stocks have been rallying since September 1 on the hope that the Fed’s efforts will not only put an end to the soft patch that cropped up in the economy over the summer but also jumpstart economic growth again. It will suffice to say that this view created a heads-stocks-win, tails-stocks-win-too environment and as such, almost all news has been good news for the past 45 days.

Even with the market soaring more than 13% in the last month and a half, the bulls have been able to somehow maintain the attitude that this is the time to buy stocks because there are blue skies ahead. The bad-news bears have argued (to no avail) that stocks are overbought and that the leadership has been lacking in recent days. But, our heroes in horns have scoffed at the idea and even got a little help from the earnings parade yesterday as Citi (C) gave the glass-is-half-full crowd a reason to be optimistic about the banks.

So, despite the old saw which suggests that trees rarely grow directly to the sky, traders have continued to buy any and all dips recently. However, after the market reaction to earnings from tech heavyweights Apple (AAPL) and IBM (IBM), the bulls’ resolve might be tested today. Which leads us to ask the question: Is it time for the long-awaited pullback to begin?

As the saying goes, it isn’t the news, but how the market reacts to the news that matters. So, the bulls have to be a little concerned about the after-hours action in The King of Cool and Itty Bitty Machines. For example, IBM reported earnings of $2.82, above the Reuters estimate of $2.75 on revenue of $24.3 billion vs. $24.1 billion. As is customary, Apple blew away estimates on many fronts with earnings of $4.64 vs. $4.08 on $20.34 billion vs. $18.9 billion. While both reports sound fairly impressive, the stocks were hammered in the after hours with IBM currently off by -3.4% and AAPL trading down nearly -5%.

So, is it time? With earnings coming in above expectations, the Fed about to launch QE II, and the Republicans about to retake the House, are we to the “sell the news” phase of this glorious trade? Or will the dip buyers continue to be emboldened as fund managers scramble to keep up with their benchmarks? Stay tuned, because this is about to get interesting.

Turning to this morning… It’s time to look alive as stocks are heading lower in the early going. In addition, we need to pay attention to the onslaught of earnings has begun – more than 110 S&P 500 companies report this week alone. In addition, China raised interest rates overnight by 25 basis points, the German ZEW Index was a bit better than expected, and Greece says everything is peachy keen and the country is on track to meet its goals.

On the economic front… Housing Starts rose by +0.3% in September to an annualized rate of 610K. This which was above the consensus for 573K. The August numbers were revised higher to an annualized rate of 608K from 598K. However, Building Permits for September fell by -5.6% to 539K, below the consensus of 565K and the August reading of 571K.

Finally, make every effort to enjoy your day…

Pre-Game Indicators
Here are the important indicators we review each morning before the opening bell…

Major Foreign Markets:
Australia: +0.08%
Shanghai: +1.58%
Hong Kong: +1.25%
Japan: +0.43%
France: -0.08%
Germany: -0.14%
London: -0.32%
Crude Oil Futures: – $1.11 to $81.97
Gold: – $13.00 to $1355.80
Dollar: lower against the Yen, higher vs. Euro and Pound
10-Year Bond Yield: Currently trading higher at 2.554%
Stocks Futures Ahead of Open in U.S. (relative to fair value):
S&P 500: -9.71
Dow Jones Industrial Average: -78
NASDAQ Composite: -20.30

Yesterday’s Earnings After the Bell

Company Symbol EPS Reuters Estimate
Apple AAPL $4.64 $4.05
Capital One COF $1.79 $1.13
Crown Holdings CCK $0.85 $0.83
IBM IBM $2.82 $2.75
Packaging Corp PKG $0.60 $0.58
VMware VMW $0.39 $0.35
Werner Enterprises WERN $0.33 $0.32
Zions Bancorp ZION -$0.47 -$0.50

Earnings Before The Bell

Company Symbol EPS Reuters Estimate
American Electric Power AEP $1.15 $1.02
Bank of America BAC $0.27* $0.11
Bank of New York Mellon BK $0.51* $0.54
Peabody Energy BTU $0.99 $0.92
EMC EMC $0.30 $0.30
Forest Labs FRX $1.00 $0.93
Goldman Sachs GS $2.98 $2.41
Harley Davidson HOG $0.40 $0.34
Illinois Tool ITW $0.83 $0.82
Johnson & Johnson JNJ $1.23 $1.15
Coca-Cola KO $0.92 $0.89
Lockheed Martin LMT $1.55 $1.67
Millicom MICC $11.09* $1.50
New York Times NYT $0.07 $0.04
Occidental Petroleum OXY $1.47 $1.39
Parker-Hannifin PH $1.51 $1.07
State Street STT $0.86 $0.83
Supervalu SVU $0.28 $0.29
UnitedHealth UNH $1.14 $0.84

* Report includes items that make comparisons to the consensus estimate questionable

Wall Street Research Summary

Upgrades:

Suntech Power (STP) – Deutsche Bank
P.T. Telekomunikasi (TLK) – Goldman Sachs
Dollar Tree (DLTR) – JPMorgan
Alcatel-Lucent (ALU) – Soleil
NetApp (NTAP) – Target increased at UBS

Downgrades:

Martin Marietta Materials (MLM) – Citi
Vulcan Materials (VMC) – Citi
Adobe Systems (ADBE) – Removed from Short Term Buy List at Deutsche Bank
Occidental Petroleum (OXY) – Removed from Short Term Buy List at Deutsche Bank
Plains Exploration (PXP) – FBR Capital
Fluor (FLR) – Goldman Sachs
Brinker Intl (EAT) – Susquehanna
Quest Diagnostics (DGX) – William Blair
VMware (VMW) – William Blair

Long positions in stocks mentioned: AAPL

David D. Moenning
Editor: Top Guns Trader

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About the Author

Written by

David Moenning is the editor of the Daily Decision service. He is not a journalist or an individual that dabbles in the market in his spare time. He is a full-time money manager and the President and Chief Investment Strategist of his Chicago based SEC Registered Investment Advisory firm. He began his investment career in 1980 and has been an independent money manager since 1987. Thus, he has been live on the firing line and investing for a living for more than two decades.