Earnings Top Expectations

SUMMARY:
- Wells Fargo pre-announcement ignites a strong continuation of the rally's second leg.
- WMT lackluster March sales seen as disappointing but it could herald the start of consumer recovery.
- Earnings season thus far rewarding as earnings top expectations. Investors now expecting too much?

Thursday was more than just a bounce, at least for part of the market.

Wednesday night we said the move up was not as strong a rebound as you want to see, but we could live with it given the leadership. Thursday was strong enough, at least on the NYSE indices given the financial stocks' rampage. The reason for the rampage was Wells Fargo pre-announced $0.53 versus $0.23. Futures were up before that news, but that is what upped the horsepower tenfold.

That was enough to overcome sloppy same store sales that saw WMT March sales +1.4%, quite off from the 3.2% expected. Overall retail sales were slimmer at -1.8% versus the -0.9% expected and the +0.3% in February. With weekly jobless claims still high (654K versus 660K and 674K prior) and continuing claims hitting an all-time high at 5.8M, a bit of consumer upset is expected. On the other hand, Japan put forth a larger than expected stimulus package and reported an increase in machinery orders. On balance the negatives were nowhere near enough to stand in front of the financials and their lead engine on the day, WFC.

Stocks gapped higher and never came back. After that initial gap and run in the first half hour stocks and the indices moved laterally for 5 hours, basically the rest of the session before a late drift higher and bump upside into the close. The indices cleared the early April peak and made some significant moves with NASDAQ 100 making a new breakout, SOX pushing the November high, the previous high since the bear market started, into the dirt, and NASDAQ moving over the January closing high.

Despite the great set ups after the pullback, the gap did not give us a chance to enter many positions. That happens. Fortunately we had taken some new positions as the opportunity presented during the past week. Moreover, an upside session ahead of a holiday typically leads to some downside early the following week and that can produce some buys. Thing is, the market is strengthening as the second upside leg breaks to a new high given the better than expected earnings and earnings pre-announcements. Thus maybe we get an entry point early next week or maybe those that gapped Thursday require a week or two to consolidate the gap and set up the next move as we cull through earnings season. There will be others stepping up in the interim and as always we just have to be patient and not chase the bus. We have some great positions we are riding higher, e.g. AMZN, BRCM, MRVL, QCOM, TSM, and we will let them move along with the newer positions we picked up the past week as well as on Thursday. You have to like how the market is rotating new leadership into the fold as the early leaders rest and set up for their next move as well. Thus you see the waves of good movers and while Thursday was hard to get in on given the gaps, the market is giving series after series of entry points. That is another sign of a healthy market.


TECHNICAL. Intraday was positive again with the gap higher, the long flat intraday consolidation, then the rise into the close. The market shot higher and held its gains without any serious test. Given the type of news that drove stocks higher it is not surprising the shorts didn't want any part of the action.

INTERNALS. Very strong breadth as you would expect with 6:1 on NYSE and 5:1 on NASDAQ. All sectors were strong as financials led the move but other sectors found reason to rally: if the financials are doing well that is good for the economy and hence the market. Volume surged back above average on NYSE though NASDAQ could not turn above average volume though trade was the best of the week. The shorts had to cover desperately once more as the market did not turn over at next resistance. There was also long buying however as you saw leaders make strong moves; most leaders have no sizeable short positions in their stocks and thus their moves are typically long buying. The drawback is volume was NOT spread out over the entire market. Most of it was concentrated in the financials as shorts are still present and they were again forced to cover.

CHARTS. There were some very key moves. SOX, the clear leader in the rally, put in a new bear market recovery high. SP600 broke out of a reverse head and shoulders pattern though it rallied right up to next resistance. NASDAQ closed over the January closing high, starting the breakout from what is more or less a 5 month Double bottom w/handle base. NASDAQ 100 made a clean break out of its 6 month base. SP500 broke from its own reverse head and shoulders pattern on that stronger, above average volume. These are all bullish indications as noted above, and they show strengthening as the upside move continues. The indices are currently on the second leg of the rally off the March low, renewing the move after the 1-2-2.5 pullback (as opposed to a 1-2-3) last week.

Some are saying that the market has to go back and test the prior lows before a sustained, long-term upside move. First, the market never has to do anything and those that expect certain things are typically disappointed. Figuring market moves is all about probabilities based upon patterns, volumes, leadership, etc. We have discussed the need for another test before. In the last bear market only one index did not undercut its prior low; all the others did and that did not require a test. This time around SOX held above the lows, never testing November. The other indices did make tests: NASDAQ 100 formed a nice double bottom as has NASDAQ. SP500 undercut its November low but again, it is not necessary that every index return to the point of origin in the selloff.

That does not mean it is all clear sailing from here. SP500 is still in a range of thick resistance from 900 to 945 and it just crossed the October lows that represent important resistance as well. SP500 will continue to work hard to get through this level, though the Friday breakout from the reverse head and shoulders gives it some upside momentum near term toward 900. From there it likely tests and extends laterally as it bumps resistance and tries to consolidate for a new breakout.

LEADERSHP: Financial leaders were of course surging along with most other financials, leader or not. Leaders in semis, tech, commodities (coming back nicely), and retail (more or less) were all moving. There were breaks higher by industrials such as DE and CMI, but their gaps were big and they never came back, and we did not want to chase the bus. Volume outside the financials, even in commodities that jumped higher, was weak. Hence the lower NASDAQ volume even as NYSE with its large financials contingent saw jumping trade. Not bad action; it is always good when leaders lead and new leaders continue to emerge. Friday saw both, and we enjoyed other investors pushing our positions taken earlier further to the upside.


THE ECONOMY

WMT March sales miss expectations. Good or bad?

Wednesday we discussed whether tumbling wholesale inventories was a good or bad indication for the economy. At this juncture, low inventories are good as that will require a rebuild and that means future production. It doesn't say much for the current situation, but it is a positive when demand rises.

Thursday there were gloomy faces with regard to the retail sector as same store sales fell 1.8% versus the 0.9% anticipated and the 0.3% gain in February. The big cherry on top (or the black rose if you want) was WMT's miss of expectations. Sales were up, but the 1.4% fell far short of the 3.2% expected.

Woe is retail, woe is retail. The giant reported worse sales and thus all must be lost. Okay there was not that level of wrist-slashing despair, but the headlines on all the financial stations, just under the Wells Fargo news, was the WMT miss and what it meant for the state of the consumer. On top of that there was the February trade gap that hit a record low (-$26.0B) as consumers shun imported goods. Of course that was February data and same store sales rose 0.3% that month so the correlation is somewhat weak; still, when the US is in recession that is the only time consumers don't consume a lot of foreign goods.

But is a WMT miss automatically a bad thing for the economy? No. WMT is huge and it has an indelible footprint on US retail sales. Nonetheless, it is still a recession stock as its sales rise in recessions along with its stock price. After a run to a peak in September 2008 WMT peaked. The market peaked as well so it is not necessarily an indication of a change specific to WMT. What does show something WMT specific is the tumble this month after WMT recovered to the 200 day SMA only to roll over and drop 10% this month as the rest of the market rallies.

WMT does worse when the economy improves because consumers no longer feel compelled to pinch as many pennies and spread out to boutiques, specialty stores, and the high end stores as well. Note that WMT started its run higher ahead of the economic downturn, outperforming nearly all retailers as investors anticipated its rising sales due to a declining economy. When investors anticipate an economic recovery, they will start unloading WMT. The rise and fall occurred in the 2000 to 2002.

Is it starting right now? WMT is not participating in the new run higher and sales have slowed. It is hard to extrapolate March alone into a decline slope for WMT sales. One month alone can be an outrider and other stores failed to show great sales either. In any event the stock price will fall ahead of a sales drop and thus we are looking at the failure to participate in this rally as a significant development. It is not definitive in itself, but with the other indications of economic improvement the past few months WMT's action is something to log with the other data. And to answer the above question, a decline in WMT's stock price is not a bad thing for retail overall and indeed generally is a positive portent for other retailers that see their business improve as consumers feel positive about a recovery and start spreading their disposable dollars around versus buying WMT's functional but painfully bland product lineup.


THE MARKET

MARKET SENTIMENT

VIX: 36.53; -2.32
VXN: 38.23; -2.27
VXO: 37.41; -1.86

Put/Call Ratio (CBOE): 0.81; -0.04

Bulls versus Bears:

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market doesn't have the cash to drive it higher.

This is a historical milestone in the making. Bulls are impressively low considering we are in general a very optimistic country. The few bulls is a positive indication because it means most everyone that is getting out is out and there is money on the sidelines. In other words the ammunition boxes are full and as the market recovers investors will start opening up the boxes and firing. Little by little they will be forced to put more money into the market and there will be some rushes higher in fear they are missing the train. You relish times when sentiment is so negative because it means some tremendous buys are setting up. This could indeed be the opportunity of a lifetime, and you take advantage of it by buying quality stocks and letting them work for you as long as they will. If we can hold them for years, great.

Bulls: 36.0%. Sharp jump in the bulls, moving back above 35%. Below 35% is a bullish indication. Above is not so bullish but is not bearish until higher levels. 31.0% the prior week up from 28.9%. Still well below the 43.0%, the prior top of the recovery as the market rallied off the November low. Bullishness bottomed on this leg lower at 21.3% in November 2008. This last leg down showed us the largest single week drop we have ever seen, falling from 33.7% to 25.3%. Hit 40.7% on the high during the rally off the July 2008 lows. 30.9% was the March low. In March the indicator did its job with the dive below 35% and the crossover with the bears. A move into the lower 40's is a decline of significance. A move to 35% is a bullish indicator. This is smashing that. For reference it bottomed in the summer 2006, the last major round of selling ahead of this 2007 top, near 36%, and 35% is considered bullish.

Bears: 37.1%. Fewer bulls but not a commensurate fall compared to bulls and their rise (38.0% last week). Big drop from 43.3% and 44.3% before that. The decline was slowing its fall from 47.2%, the peak for the run this year but no more. Hit the 34's on the lows, falling from 38.5% and 46.2% in mid-December. Still above the 35% level considered bullish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment on this move. 35% is the level that historically indicates excessive pessimism. As with the bulls the jump in bears did its job after hitting 44.7% in the third week of March. Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). This is a huge turn, unlike any seen in recent history.


NASDAQ

Stats: +61.88 points (+3.89%) to close at 1652.54
Volume: 2.099B (+16.85%)

Up Volume: 1.98B (+494.461M)
Down Volume: 191.13M (-166.801M)

A/D and Hi/Lo: Advancers led 4.8 to 1
Previous Session: Advancers led 2.58 to 1

New Highs: 25 (+19)
New Lows: 7 (-3)

NASDAQ CHART: http://investmenthouse.com/ihmedia/NASDAQ.jpeg

NASDAQ 100 CHART: http://investmenthouse.com/ihmedia/NASDAQ100.jpeg

SOX CHART: http://investmenthouse.com/ihmedia/SOX.jpeg


SP500/NYSE

Stats: +31.4 points (+3.81%) to close at 856.56
NYSE Volume: 1.836B (+39.54%)

Up Volume: 1.713B (+757.883M)
Down Volume: 115.554M (-230.456M)

A/D and Hi/Lo: Advancers led 5.94 to 1
Previous Session: Advancers led 2.73 to 1

New Highs: 14 (+10)
New Lows: 64 (+16)

SP500 CHART: http://investmenthouse.com/ihmedia/SP500.jpeg


DJ30

The Dow bounced off the 10 day EMA support and moved through 8000. That takes it into the lower ranges of the January/February consolidation but that only puts DJ30 right in the middle of resistance up to 8375. It made a new closing high on this move off the March low so there are positives; it is just that DJ30 has been less than inspiring, letting the other indices do the work.

Stats: +246.27 points (+3.14%) to close at 8083.38
Volume: 462M shares Thursday versus 255M shares Wednesday. The financial issues on the Dow were jumping on strong volume.

DJ30 CHART: http://www.investmenthouse.com/ihmedia/DJ30.jpeg


MONDAY

The market finished the shortened week with strength, moving higher on rising volume. Often when the market closes strong ahead of a holiday it is down to start the next week. With the gaps higher Thursday that makes some sense; so many stocks gapped higher and not all were worthy but were just caught in the whoosh higher. Thus we could very easily see some backfilling to start next week despite the strong move to continue the second leg higher off the March low shown on Thursday. That could give us some good entry points on some of those great stocks that jumped higher Thursday such as CMI, SCHN, DE, MR, and quite a few others. Patience; let them come to us. As noted above it could be a day or two or it could be a week or two before they are ready depending upon what the overall market does with the move.

As for what Thursday and the WFC pre-announcement means we need to get past the initial euphoria the shock of 2x expectations placed in investors' minds. The WFC earnings on top of RIMM's earnings have investors starting to consider that things are not as bad as everyone thought. Some are even saying that we could get a positive GDP reading in Q2.

Maybe we will, but we need to put things in perspective. The WFC earnings were very nice to see as they showed mortgages are recovering and that basically banks can make money in this environment. But what is the environment? The Fed has reduced the cost of lendable funds to banks to virtually zero, and banks can turn around and loan the money from 2% on up to 5% and more. With many individuals and companies starved for credit to operate, banks such as WFC are making money hand over fist with this incredible gift from the Fed. Let's face it, a trained monkey could make money in this circumstance. Maybe not even trained monkeys.

Does that translate to other sectors of the economy? No. They don't have the no cost funds to operate with. Indeed, when you are dealing with banks right now there is massive unfairness and indeed a lack of equal protection under the Constitution. The Congress has set up zones of the country where loans are not equal. If you live in Florida, parts of New York or California, a jumbo loan is not limited to $417K to be conforming as it is in all the rest of the country. This involves mostly individuals, but the point is the same: the banks are getting a sweetheart deal, some people by virtue of where they live are getting a sweetheart deal, but none of the rest of us are.

Thus the euphoria spawned by the RIMM/WFC earnings could be setting up disappointment as more earnings come out if the majority view these two reports (and we will throw in BBBY because it too had good earnings) as definitive of the earnings season. Harsh reality could quickly turn the excitement to some consternation.

Hopefully earnings will continue to surprise. That will continue to help the market . . . to a point. At some point, even in good earnings seasons, the market hits its good news saturation level. Despite continuing good tidings there comes a point where each additional positive story has a lower marginal impact until they have no impact. The market cannot ride news higher indefinitely, and when that point is hit then there is a correction. If earnings continue to turn up better the market will rally on this second leg until the saturation point and then it will sputter along with the second leg.

That is of course not the case right now. The earnings are new, fresh, and better than expected. The stock move is strengthening as of Friday. That means we will continue looking for opportunity to invest in this second upside leg and that means some testing by stocks that gapped higher Thursday or were already moving well ahead of the news. It also means we look for newly emerging stocks as well because as we know, stocks in rallies come out in waves. The early leaders take off, run higher, then test. As they were making their moves others were setting up bases and then make their break higher as money moves from the early leaders to the newly emerging. It flows around the market, eventually getting back to the early leaders after they test and come back to near support and we see them rally off that test once more. Have said it before: rotation is not just good for tires.

So we enter this week with a strengthening second upside leg and that means we continue looking for entry points on solid stocks whether it is an early week pullback to test the gaps higher or new stocks emerging from bases. At the same time there is the earnings overlay. Thus far so good but we are not counting on that holding up. And as noted, even if it does, at some point the news is no longer news. The beauty of that is we get a nice run for our positions, take some nice gain, and then are more than ready to see the market test back.


Support and Resistance

NASDAQ: Closed at 1652.54
Resistance:
The January closing peak at 1653
1666 is the intraday January 2009 peak
1780 is the November 2008 peak
1947 is the October gap down point

Support:
1644 from August 2003
1623 is the April peak
1620 from the early 2001 low
1603 is the December peak
1598 is the February 2009 peak, the last peak NASDAQ made
1587 is the March 2009 high is getting put to bed again
The 10 day EMA at 1581
1569 is the late January 2009 peak
1542 is the early October 2008 low
1536 is the late November 2008 peak
1521 is the late 2002 peak following the bounce off the bear market low
The 50 day EMA at 1508
1505 is the late October 2008 closing low.
1493 is the October 2008 low & late December 2008 consolidation low
The 50 day SMA at 1478
1440 is the January 2009 closing low


S&P 500: Closed at 856.56
Resistance:
857 is the December consolidation low
866 is the second October 2008 low
878 is the late January 2009 peak
889 is an interim 2002 peak
896 is the late November 2008 peak
899 is the early October closing low
919 is the early December peak
944 is the January 2009 high

Support:
853 is the July 2002 low
848 is the October 2008 closing low
846 is the April peak
839 is the early October 2008 low
833 is the March 2009 peak
The 90 day SMA at 827
The 10 day EMA at 825
818 is the early November 2008 low
815 is the early December 2008 low
805 is the low on the January 2009 selloff. KEY Level
The 50 day EMA at 805
800 is the March 2003 post bottom low
768 is the 2002 bear market low
752 is the November 2008 closing low but it is not broken and done away with
741 is the November 2008 intraday low


Dow: Closed at 8083.38
Resistance:
8141 is the early December low
8175 is the October 2008 closing low. Key level to watch.
8197 was the second October 2008 low
8375 is the late January 2009 interim peak
8419 is the late December closing low in that consolidation
8451 is the early October closing low
8521 is an interim high in March 2003 after the March 2003 low
8626 from December 2002
8829 is the late November 2008 peak
8934 is the December closing high
8985 is the closing low in the mid-2003 consolidation
9088 is the January 2009 peak

Support:
The April peak at 8076
The 90 day SMA at 7975
7965 is the mid-November 2008 interim intraday low.
7932 is the March 2009 peak
7909 is the early January low
7882 is the early October 2008 intraday low. Key level to watch.
7867 is the early February low
The 10 day EMA at 7846
The 50 day EMA at 7703
7702 is the July 2002 low
7694 is the February intraday low
7552 is the November closing low. KEY Level.


Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.

April 14 - Tuesday
PPI, March (8:30): 0.1% expected, 0.2% prior
Core PPI (8:30): 0.0% expected, 0.1% prior
Retail sales, March (8:30): 0.3% expected, -0.1% prior
Retail ex-auto (8:30): 0.1% expected, 0.7% prior
Business inventories, February (10:00): -1.1% expected, -1.1% prior

April 15 - Wednesday
CPI, March (8:30): 0.2% expected, 0.4% prior
Core CPI (8:30): 0.1% expected, 0.2% prior
New York PMI, April (8:30): -35.0 expected, -38.2 prior
Capacity Utilization, March (9:15): 69.7% expected, 70.9% prior
Industrial Production, March (9:15): -0.9% expected, -1.4% prior
Crude oil inventories (10:30): +1.6M prior
Fed Beige Book (2:00)

April 16 - Thursday
Housing starts, March (8:30): 550K expected, 583K prior
Building permits, March (8:30): 550K expected, 547K prior
Initial jobless claims (8:30): 654K prior
Philly Fed, April (10:00): -32.0 expected, -35.0 prior

April 17 - Friday
Michigan Preliminary sentiment, April (9:55): 58.5 expected, 57.3 prior

By: Jon Johnson, Editor
Copyright 2009 | All Rights Reserved

Jon Johnson is the Editor of The Daily at InvestmentHouse.com

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