Key Events for the Week
Note: - All earnings dates listed below are tentative and subject to change.
This Week’s Economic Reports
Tuesday – The Case/Shiller home price index for February and the April consumer confidence index
Wednesday - Weekly U.S. petroleum supplies and a statement on monetary policy by the Federal Open Market Committee.
Thursday – Weekly initial jobless claims.
Friday - An advance look at first-quarter gross domestic product, the April Chicago business barometer and the April University of Michigan consumer sentiment index.
This Week’s Earnings Reports
Tuesday – 3M Company (MMM), DuPont (DD), Ford Motor Co. (F), Lexmark International Inc. (LXK), Newmont Mining Corp. (NEM), Office Depot Inc. (ODP), U.S. Steel Corp. (X), UAL Corp. (UAUA), Under Armour Inc. (UA), United Parcel Service Inc. (UPS), Broadcom Corp. (BRCM), Panera Bread Co. (PNRA), and RF Micro Devices Inc. (RFMD).
Wednesday - Barrick Gold Corp. (ABX), Comcast Corp. (CMCSA), Corning Inc. (GLW), Hecla Mining Co. (HL), Royal Caribbean Cruises Ltd. (RCL), The Allstate Corp. (ALL), Baidu Inc. (BIDU), First Solar Inc. (FSLR), Visa Inc. (V), and Xilinx Inc. (XLNX).
Thursday – Aetna Inc. (AET), Akeena Solar Inc. (AKNS), Colgate-Palmolive Co. (CL), ConocoPhillips (COP), Eastman Kodak Co. (EK), Exxon Mobil Corp. (XOM), Fortune Brands Inc. (FO), Kellogg Co. (K), Motorola Inc. (MOT), OfficeMax Inc. (OMX), Potash Corp. of Saskatchewan (POT), The Procter & Gamble Co. (PG), Chiquita Brands International Inc. (CQB), KLA-Tencor Corp. (KLAC), McAfee Inc. (MFE), and MEMC Electronic Materials Inc. (WFR).
Friday - Avon Products Inc. (AVP), Chevron Corp. (CVX), China Sunergy Co., Ltd. (CSUN), and Constellation Energy Group Inc. (CEG).
Outlook for the Week
There certainly doesn’t seem to be much that is going to contain the bulls' momentum. Last week we had some very major detrimental news items, reports and poor earnings reports which favored the bears, but as we saw, this was not enough to aid their cause. Some of these situations are:-
• The continued effects of Goldman Sachs (GS) being charged by the Securities and Exchange Commission for defrauding investors on Friday.
• The Icelandic volcano still creating economic woes for many businesses, not only the travel industry.
• Greece's sovereign debt raised its ugly head once again.
• Disappointing forecasts from eBay (EBAY) and Qualcomm (QCOM).
As we have seen from the past, this type of news is usually enough to send the stocks tumbling, despite the presentation of good news! However, this did not occur, and the positive aspects became the winner. Some of these are:-
• Citigroup (C) reported a solid quarterly earnings report.
• The Conference Board noted that its index of leading economic indicators jumped 1.4% in March.
• Goldman Sachs (GS) helped recoup some of its bad reputation by reporting a 91% surge in first-quarter profits.
• Harley-Davidson (HOG) and Coach (COH) filed positive reports.
• Apple Inc. (AAPL) provided the tech-laden Nasdaq Composite (COMP) with a boost from its report.
• Good quarterly reports from Boeing (BA) and United Technologies.
• An unexpected weekly decline in initial jobless claims.
• A stronger-than-expected 6.8% jump in existing home sales for March.
• The Commerce Department's announcement that new home sales zoomed to a healthy 27% rise last month.
• The European Union and the International Monetary Fund put together a bailout package for the debt-ridden Greece.
So there does not seem to be too much to contain growth, with the Dow Jones Industrial Average (DJIA) having had its eighth consecutive increase, the S&P 500 Index (SPX) broke above the 1,200 level, leads us to the question, “Where do we go from here?” The market's momentum continues upwards with investors focusing on earnings, which continue to beat expectations, despite the fact that earnings expectations are too high. It appears that we are definitely in a “relief” stage of a “bull market”, as I discussed last week.
Having said that we must take into consideration several facts:-
• Many investors are realizing that company earnings results, that are continuing to beat expectations, have become too high too quickly.
• Last week's American Association of Individual Investors' poll revealed that the percentage of bullish investors dropped from 48% to 38%, and the bearish percentage jumped from 29% to 34%.
• The percentage spread between SPX historical volatility and the actual CBOE Market Volatility Index (VIX – 16.62) has seen a narrowing of significance, during the past three weeks, with little effect on the market.
• Looking at the chart below, one of the biggest areas of opportunity, at this stage, appears to be in the small-cap names, as represented by the iShares Russell 2000 Index (IWM). The graph displays the 50-day cumulative buy (to open) put volume on the iShares Russell 2000 Index (IWM), PowerShares QQQ Trust (QQQQ) and the SPDR S&P 500 ETF Trust (SPY). In each of these cases, put volume is below 2008 peak levels. Also, the cumulative put volume, on the IWM, is at an unusual 60% off its high. This indicates a bullish inclination for the IWM.
Pullbacks will occur, as evidenced by previous “bad news/good news weeks,” which should be continued to be viewed as buying opportunities, with an emphasis on consumer discretionary, real estate, financial and small-cap names.
Caution is always the by-word, but, there is also a need to take any opportunities that the market will throw your way, and we are in a market that is providing this opportunity at the moment.
Profit-making in the week ahead should be good!
Companies to Keep an Eye On
D.R. Horton, Inc. (DHI)
D.R. Horton, Inc. (DHI) is a homebuilding company, which constructs and sells homes in the U.S., and through financial services operations, it provides mortgage financing and title agency services to homebuyers.
Due to news on Thursday, that existing home sales increased by 6.8% last month, and that new home sales skyrocketed 27% in March, marking the largest percentage gain since April 1963, homebuilder companies saw a surge in their share prices. D.R. Horton, Inc. (DHI) was one of these lucky recipients. D.R. Horton, Inc. (DHI) saw call volume grow enormously, three times its normal volume, on Wednesday, after the shares reached a new high of $13.90.
The shares of DHI have established a foothold above their aligned 10-month and 20-month trend lines which is very bullish. The stock has managed to gain a new annual high of $14.54 in intra-day trading, and is poised to close the month above the $14 level for the first time in two years.
However, there appears to be plenty of pessimism surrounding the building industry, and DHI is no different, particularly with the majority of analysts ranking it as “hold” or worse. As the homebuilder continues to improve, a short-squeeze situation or a number of upgrades could help DHI extend its year-to-date advance of more than 25%. It appears that the skepticism surrounding the sustained growth of building companies, comes from a fear factor established two years ago, and now needs to be re-thought.
Financial Select Sector SPDR (NYSE: XLF)
The Financial Select Sector SPDR (NYSE: XLF) replicates the financial sector of the S&P 500. It is the largest and most widely traded financial ETF, comprised of 79 of Wall Street's most notable financial companies. Exchange traded funds (ETFs), which track the overall movement of a sector, present an excellent way to trade the financial sector.
The fund's top-ten holdings include the Bank of America, comprising 10.2% of the ETF, and JPMorgan Chase at 10.0%. Wells Fargo & Co. (NYSE: WFC) comprises 9.5%, Citigroup is at 5.3%, and Goldman Sachs is at 4.8%.
Other major fund components include diversified financial service companies (comprising 30.4% of the fund), commercial banks (20.0%), capital markets firms, which trade debt and equity securities, (19.2%), and insurance firms (15.8%).
Currently, XLF is up about eleven percent year-to-date, making it one of the top-performing financial ETFs. XLF also provides an annual dividend of $0.34, giving it a yield of 1.2%. The ETF has an expense ratio of a mere 0.22%.
Technical and fundamental factors show that XLF has strength. Since bottoming out near $5.75 in March 2009, the fund has, so far, climbed 192% to $16.78, and it remains in a strong uptrend.
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Back to Stock Options Made Easy from Market Outlook April 26, 2010