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Follow-Up: Technical Trouble on the S&P 500 (SPY, GS, JPM, AAPL, CSCO, GOOG, F, GE, CAT, GLD, UUP)

December 8, 2009 1 comment

We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble.  On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%.  Basically, the market has gone nowhere in that time.

What has happened, however, is that the chart has given us some more signs that the market is running into trouble.  Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.

As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low.  It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.

Additionally, this chart shows that we have broken the uptrend that was established since the March lows.  Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.

For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:

The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112.  As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.

The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year.  Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash.  But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year.  It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.

-Lucid Markets Team

Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.

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The Half-Way Point: Earnings Season Observations (SPY, QQQQ, DIA)

October 21, 2009 Leave a comment

stocksSo far this earnings season, 77% of companies have posted EPS numbers in excess of their estimates.  This is extremely high from a historical perspective, and shows just how much the street analysts have underestimated the recovery in the market.

As we have said before, however, this earnings season is all about revenue.  It is much easier for a company to post good EPS numbers as they slash costs by cutting staff and capital expenditure.  Much harder to manufacture is revenue numbers, and this earnings season is separating the former from the latter. This helps explain why, despite the high percentage of EPS beats, the average stock has actually declined 0.72% on its reporting day (Source: The Bespoke Investment Group, found here).

I noticed this trend during last quarters reporting season.  The companies that reported first all benefited from EPS expectations that had not been adjusted up enough to match the cost cutting that was being implemented.  During first few weeks, the majority of companies beat expectations, and their stocks took large leaps on those days that they posted.  The euphoria spread to their respective industry peers, and by the midway point the market was feeling pretty good.  However, while formal expectations didn’t increase drastically, whisper numbers for the later-reporting companies did until finally they were too high.  So when those companies actually reported, they fell short and the stock dropped.

I have no insight as to whether this will happen this earnings season, but I would say it is a definite possibility, especially in industries like health care and technology where the vast majority of companies have seen large jumps in share price as they handily beat expectations.

-AH

Disclosure: Long T and MSFT.

Earnings Preview 10/20/09: Big Day for the Dow (UTX, KO, CAT, DD, BLK, COH, UAUA, PFE, CNI, YHOO)

October 19, 2009 Leave a comment

Some big names, including 5 of the 30 Dow components, will be reporting earnings tomorrow. What follows here is a rundown of what to expect:

Before Market Open:
United Technologies Corp (UTX): Analysts are expecting EPS of $1.12 on revenue of $13.31B, which would be a 10% decline from the year ago quarter.  EPS estimates have remained stable over the last 90 days, so I doubt the market is expecting any less than a beat of those numbers. GE’s numbers did not paint a great picture for conglomerates, but unlike the General, United Technologies is not burdened by a dismally performing capital arm so there is probably little comparison there.
YTD: +22%     One Month: +4%

Coca-Cola (KO): Analysts are expecting EPS of $0.82 on revenue of $8.12 bn, equating to a 3.2% decline compared to the year ago quarter.  EPS estimates have risen slightly, compared to 60 days ago, so it is hard to know what the street expects.  Closely watched will be the revenue numbers to see if the company can grow out of the recession, and provide investors with good numbers made without resorting to drastic cost cutting.  A wildcard here is the declining dollar; since Coca-Cola has a strong presence abroad their numbers could be helped by favorable currency conversion rates relative to previous quarters.
YTD: +21%     One Month: +1%

Caterpillar (CAT): The provider of heavy-machinery is expected to report EPS of $0.06 on revenue of $7.49 bn, a drastic 42% decline from the year ago quarter.  The standard deviation of EPS estimates is high, so clearly the street has no coherent strategy in mind for these earnings.  Caterpillar has obviously been hit hard by the decline in construction spending, both residential and commercial, and their earnings will give some indication whether the tangible economy is actually improving.  It is my belief that Caterpillar is one of the key stocks to watch tomorrow for market direction.
YTD: +29%     One Month: +8%

EI DuPont de Nemours & Co. (DD): Analysts are expecting EPS of $0.33 on revenue of $6.14 bn, which would be a 15% decline from a year ago.  Wall Street has published cautious earnings for the chemical giant, following the company’s own reserved guidance.  Revenue will be the keenly watch figure, as investors will look to see if the decreased fear about the construction sector is well founded.  DuPont will also provide some clarity over DOW’s earnings later in the week, and as both stocks have performed admirably this year, these numbers will be watched intensely. On the docket will be the dividend, and traders will be interested if there is to be any cut, because their dividend of $0.41 per quarter will not be covered by earnings should they come in at expectations.
YTD: +37%     One Month: +2.5%

BlackRock (BLK): Analysts expect earnings of $1.90, on revenue of $1.12 bn which is nearly 15% below last year.  BlackRock has had a stellar year, and is currently pushing new 52 week highs.  Tomorrow will be the test to see whether they deserved it.  Certainly, the relentless rebound from market lows will have benefited the company, although traders will be interested in whether funds under management have increased and where those funds are flowing too.  The conference call should be of great interest to the street, to hear first hand what the company is seeing from the people who invest through it.  Estimates have increased dramatically over the last year as the market rose, however, investors will still be looking for the company to beat those estimates to justify the approximately 150% gain since market lows.
YTD: +72%     One Month: +11%

Coach, Inc. (COH): Analysts expect EPS of $0.39 on $748.73 mm of revenue, equating to a small drop compared to the year ago quarter.  For this company, closely watched will be same store sales and ASPs as traders try to get a handle on retail sales.  Certainly the street expects the company to beat these estimates, as expectations have not risen in the past 90 days, and the dollar decline should help this company which gets a large portion of its sales from its strong international presence.
YTD: +66%     One Month: +2.5%

UAL Corporation (UAUA): The holding company for United Airlines is expected to report a loss of $0.94 per share on revenue of $4.34 bn, or a 22% decline from the year ago quarter.  Analysts will be looking for the company to beat those numbers, and will be interested in fuel hedging strategies as the price of crude inches up again.
YTD: -34%     One Month: -15%

During Market Hours:
Pfizer (PFE): The pharmaceutical giant is expected to post earnings of $0.48 on $11.42 bn of revenue, a decline of 6% compared to last year.  Now that the Wyeth deal has been closed, investors will be interested to see the effects on the bottom line, and to hear management’s report of how things are going with the integration and how any cost savings are panning out.  Earnings estimates have been flat for the past 90 days, and traders will expect earnings to come in above expectations.
YTD: +1.5%     One Month: +9%

After Market Close:
Canadian National Railway (CNI): The railroad company is expected to post EPS of $0.82 on revenues of $1.86 bn, a decline of 14% over last years equivalent quarter.  These earnings will show people whether consumer and business spending is picking up, as the railroad traffic will increase if the economy is improving.  An interesting point is whether energy transportation will increase, given the increased price of oil, CNI will give another data point showing whether or not the oil sands mining operations have picked back up.  The declining dollar may hurt CNI as 19% of their revenue comes from U.S. domestic traffic.
YTD: +44.5%     One Month: +4%

Intuitive Surgical (ISRG): This once high-flying manufacturer of surgical instrument has produced some schizophrenic earnings in the past, but is expected to post an EPS of $1.46 on revenue of $256.44 mm. Analysts have increased their EPS expectations drastically over the past 90 days, and the stock has responded by rising dramatically.  With such a highly valued PE, traders are always looking for the company to beat earnings, but probably never before as much as now.  The street has widely missed the company’s earnings the past two quarters, and will be looking for some more stability this time around.
YTD: +108%     One Month: +6.5%

Yahoo! Inc. (YHOO) – The internet giant is expected to post $0.07 EPS on revenues of $1.12 bn, a decline of 15% from a year ago.  Believe it or not, rumors are still swirling about a more formal tie-up with Microsoft, especially in light of Microsoft’s Bing which got off to a great start but has tapered since then.  Look for questions about this in the conference call, and my guess is that the response will be a sharp negative.  Carol Bartz has had a few quarters at the helm of Yahoo, and the company isn’t looking as weak as it did during the crazy Jerry Yang-playing-CEO period, but eventually the company will have to produce some good numbers to back up the tough talk.
YTD: +41%     One Month: -1%

-AH

Disclosure: Long Microsoft