Investor’s first read – Brooksie’s edge before the open
Monday, February 27, 2012 8:54 a.m. ET
DJIA: 12,982.95 S&P 500: 1365.74
I scanned hundreds of companies over the weekend, searching for “buys” and of course found many of the best have had big jumps since October. That suggests short-term risk of a correction or consolidation. A correction would be a pullback offering a better entry point; a consolidation would be a sideways move, also with a better entry point but not as good as a correction offers.
Even so, there are still a lot of stocks that are breaking out of consolidation patterns, or exhibiting unusual high volume [UHV] that offer opportunities. So what does one do ?
It’s mostly a matter of valuation. They aren’t going back to their October or earlier price levels, but many will eventually go higher in face of earnings growth and an expansion of multiples to earnings which are still scrunched as a result of fears of a European meltdown.
I do think we will see a 5% to 7% correction in the major market averages within 6 weeks. It’ll start as a minor 3% correction, but at the point where it is ready to rebound a news item will force it lower.
Overriding all of this, there is a powerful force that has been driving stock prices–higher, even in face of a scary investment environment [Europe]. This “FORCE”will dominate the market going forward and drive it higher, even unreasonably higher.
The pros (money managers, hedge funds, BIG money) are pressured to buy, even stocks that have had nice gains. If they don’t make money for clients, they will lose them. The public is not in the market with both feet – yet. They will come storming in closer to a market peak.
While it is normal to have a lot of cash on the sidelines at bear market bottoms, it is not normal to have a lot of cash on the sidelines after a bull market has progressed as much as this one has.
As a result of the fear of contagion in Europe, a lot of cash is stashed in “safe havens.”
With a prospect of a Euro-meltdown lessened, that cash stands to come out and go into stocks. When that happens, long-term bonds stand to decline and especially if the prospect of higher interest rates 6 months to a year out looms.
Under these conditions, it becomes easier for money managers to justify buying stocks selling at higher and higher multiples of earnings, which they expect to sell to someone else at an even greater multiple.
The doomsters are still there, preaching doom as they have been since the bull market started 32 months ago. What a disservice they have done to their listeners. Listen, if you can’t forecast, forecast often, eventually you will be right !
Higher gasoline prices is their latest. These are due to a number of things including Mid-East tensions, Iran, economic recoveries in Asia and the U.S., but I suspect some of the upward pressure comes from speculator’s hype.
ECONOMIC REPORTS: As long as U.S. economic indicators signal recovery, these reports are only a minor driver of stock prices. Should they soften, the market will go into a nasty correction.
- Pending Home Sales (10 a.m.) Fell in Dec. after 7.3 pct. gain in Nov. and 10.4 pct. gain in Oct. Year on year sales gained 5.6 pct.
- Durable Goods (8:30 a.m.) rose 3 pct. in Dec. after 4.2 pct rise in Nov..
- S&P Case Shiller Home Price Index (9 a.m.) Dropped 0.7 pct. in Nov. for sixth time.
- Consumer Confidence (10 a.m.) dropped to 61.1 in Jan. from 64.8 in Dec.
- GDP (8:30 a.m.) for Q-4rose 2.8 pct. from Q3’s 1.8 pct., but most of rise was accounted for by an increase in inventories.
- Chicago ISM ( 9:45 a.m.) regional manufacturing dropped 3 points to 60.2, but is well above the “50” threshold for growth.
- Beige Book (2 p.m.) comments follow regarding economic outlook. It is released two weeks before FOMC meets.
- Motor Vehicle Sales (time: ?) Auto sales jumped 13.8 pct in Jan., trucks declined 4 pct. the first time in nine months autos outsold trucks.
- Jobless Claims (8:30 a.m.) Were unchanged for week ending Feb. 18
- Personal Income and Outlays (8:30 a.m.) P.I. increased 0.5 pct in Dec. following a 0.1 pct increase in Nov.
- ISM Manufacturing Index (10 a.m.) Rose one point in Jan. to 54.1 thanks to new orders which were up 2.8 pct.
- Construction Spending (10 a.m.) Jumped 1.5 pct. on top of a November increase of 0.5 pct..Private nonresidential outlays were ahead 3.3 pct..
Feb. 6 DJIA: 12,845 “Follow the Money as It Exits Safe Havens“
Feb. 7 DJIA: 12,878 “Market Held Up By Sneaky Buying“
Feb. 8 DJIA: 12,883 “Is It Safe For Bulls to Come Out and Play?“
Feb. 9 DJIA: 12,890 “BIG Money Buying the Future“
Feb. 10 DJIA: 12,801 “Can a Greek Deal Be Accomplished Over the Weekend?“
Feb. 13 DJIA: 12,874 “Easy Does It! Some Selling Into Good News Expected“
Feb. 14 DJIA: 12,878 “Investors Should Expect “Market Churn”“
Feb. 15 DJIA: 12,780 “Market Churn to Include Brief Correction“
Feb. 16 DJIA: 12,904 “Another Snag in Greek Bailout + Long Weekend = Extended Correction“
Feb. 17 DJIA: 12,949 “Investors Establish Bullish Turf“
Feb. 21 DJIA: 12,965 “The Market’s Stall is Deceptive While Selected Issuers Could Hum“
Feb. 22 DJIA: 12,938 “Rotation of Strength: Continuing Opportunities as Market Averages Remain Sluggish“
Feb. 23 DJIA: 12,984 “Market Stall Masks Opportunities“
Feb. 24 DJIA: 12,982 “Speculators Hyping $4 Gasoline by Summer“
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.