Actionable insights straight to your inbox

Equities logo

Q1 Earnings and Sequester Uncertainty Deserve More Respect

Just in time. While the bulls didn’t reverse a deteriorating technical pattern yesterday, they did prevent it from getting worse.Nasdaq’s behavior left a lot to be desired. The Russell 2000

Just in time. While the bulls didn’t reverse a deteriorating technical pattern yesterday, they did prevent it from getting worse.
Nasdaq’s behavior left a lot to be desired. The Russell 2000 stank out the park.
This may reflect an increasing preference for “quality” now. In time, that preference will be replaced by a preference for more speculative issues, especially small-cap stocks.
The DJIA was up $89 for the day, but $66 of that gain was contributed by five of the 30 Dow stocks – (United Health: (UNH +$2.77), Home Depot: (HD +$1.35), McDonalds: (MCD + $1.21), Procter & Gamble (PG +$1.26), and International Business Machines (IBM+$1.98). Twenty eight of the top 30 S&P 500 were up.
The Q1 earnings season will launch next week with Alcoa’s (AA) report on Monday. S&P 500 profits overall are expected to slip 1.9%, its first downer since 2009. Q4 earnings increased 8%.
TODAY: Reportedly, two months ago, analysts had expected Q1 earnings to be up1.2% . The question here should be, has the Street fully digested this change in expectations ?
The second question should be, how much of an impact will sequester have on the economy and consequently on the stock market ?
If the answer to either or both of the above is worse than expected, we are looking at a 3% to 5% correction in the next 4 weeks.
Currently, the assumption appears to be – “no sweat” for either.
Aside from the Russell 2000, the major market averages are at an all-time high, not discounting any adversity or unpleasant surprises.
Bull markets continue in a state of indifference (and vulnerability) until something triggers a correction.
I think the two unresolved questions noted above deserve more respect, ergo a cash reserve.
Investor’s first read – an edge before the open

DJIA: 14,662.01
S&P 500: 1,570.25
Nasdaq Comp.: 3,254.61
Russell 2000: 974.30
Wednesday, April 3, 2013 (9:01 a. m.)
SEQUESTER: I’m keeping this posted so you don’t forget the market may begin to worry about its impact.
This week will feature some key economic reports (see below). At some point, the question will be raised about the sequester’s impact on the economy, notwithstanding the uncertainty it brings to persons at risk, directly and indirectly.
It is too early to expect anything to show up in the indicators, and it may never be a major issue if our economic recovery gains traction.
It is one of those potential negatives one has to consider along with other ingredients that lead to a decision to buy or sell.
Employers (government or private) may opt to furlough employees without pay, cut back on hours rather than release them to unemployment at the expense the government. Even so, several weeks without pay has an impact on the economy.
This is one of those uncertainties that, along with a few others, can trigger a consolidation or pullback in the stock market.
It is important to note (again) that the stock market is at the same level where the bear market of 2007-2009 began. The difference now vs. then is we are not currently facing the horrendous string of adversities here and abroad we faced then. Real estate is recovering, corporations are sitting on huge stashes of cash, which must soon be spent, employment is improving, and there seems to be a greater willingness in Washington to address problems. Europe is on the mend.
We are not engaged in a full scale war, BUT I wouldn’t rule out U.S. intervention in the supply of aid to Syria from Iran.
Apple (AAPL: $429.72)
The good news is APL did not tank at the open yesterday. The bad news is, it gave up an intraday gain of $11 with selling picking up in the afternoon.
Volume increased as it skidded lowed, but it held on to a slight gain for the day.
Undoubtedly, sellers came out in force, but there were enough buyers to prevent a rout. Odds slightly favor a break below $400, but support at $419 must give way first.
Technically the pattern is ugly, but this company is a leader in a dynamic industry and is down 39% from its September high of $705. At some point the BIG money will see irresistible value. Most likely, these big hitters would like to see a flush to $385, and they could get that, unless others step in ahead of them.
Currently, the Street is concerned about its product refresh cycle, criticism by the Chinese government and its legal battles with Samsung. However, it acts as if something else is spooking buyers.
There was no indication yesterday that AAPL is on the verge of a technical rebound. That can still happen, but its market action over the last five days will be tough to reverse.
I am not long or short AAPL.
FACEBOOK (FB – $25.42)
FB had a nice pop at the open yesterday, but sellers were quick to pounce, closing it at its low for the day. Buyers met sellers head-on yesterday – it would have to be called a “draw.” Resistance is now$26.00, Support: $24.88. The reversal of its 13.8% slide since March 7 came on March 26 at $24.72. During that time buyers and sellers had a big day. A break below $24.72 would lead to a drop to $22.50 – $23.25.
So, where has the selling come from ?
Possibly from IPO investors whose shares came out of lock-up, the latest being 777 million shares freed up in mid-November. .
That would be good news, since no one can blame them from raising cash for other purposes, even if they could get a higher price in the future. If they genuinely feel the stock is not worth the mid-20s, FB’s stock has a problem.
Between Aug. and Dec. last year, a trading range between$18 and $24 developed. That should provide support for FB and a buying opportunity. That’s where a three month tug of war took place between the believers and non-believers.
Support is now $25, resistance is $25.90.
I am not long or short Facebook.
This will be a heavy week for economic reports.
But the Street is heartened by favorable economic data on employment, personal income, consumer sentiment, auto sales construction spending, durable goods manufacturing, and housing.
I am going to list the economic reports below but will not include the numbers from the last report, since those numbers are often revised significantly and therefore are potentially misleading.
I strongly urge you to access the website: for detailed reports on this week’s calendar and an excellent recap (plus graphs) of last week’s reports. The site does a great job graphically illustrating key indicators.
ADP Employment Report(8:15)
ISM Non-Mfg. Ix. (10:00)
Jobless Claims (8:30)
Employment Situation Report (8:30)
International Trade (8:30)
Consumer Credit (3:00 p.m.)
George Brooks
“Investor’s first read – an edge before the open”
[email protected]
The writer of Investor’s first read, George Brooks, is not registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

Here are the weekly trading strategies employed by the Tradier investing community.