Greetings Trade Stakers, Bull Baiters, and Money Makers,
This past week the markets continued climbing higher but we still managed to make some excellent money on the downside...
LINCARE HOLDINGS (LNCR) PLUNGED OFF A CLIFF TUESDAY FOR A SWEET TWO-WEEK ONE-HUNDRED-FIFTEEN PERCENT PROFIT!
Of course some of you did far better than our official exit as the stock continued sinking for the rest of the week--so congratulations if you are among them.
But what about the rest of our trades?
We're stacked completely on the bearish side so this continued upturn has hurt our plays--on paper. At this point not a single stop has been hit and this market is likely to rapidly lose steam in the coming weeks so hang in there.
To get a better idea of what is coming up now--AND where the profits are likely to be found let's take a good look at...
WHICH WAY THIS MARKET IS HEADED
This past week the markets climbed higher with an average gain around 4%--but much of those gains were short covering. On Friday the S&P was trending lower as it approached the one o'clock mark. Then GE announced they were raising their dividend and restarting their stock buy-back program. Plus GENZ announced a possible buy-out offer and that one-two punch triggered a burst of short covering pushing the S&P to 1103---just barely over psychological resistance at 1100 and the SPs 200day moving average.
For two hours a battle was waged at 1100 resistance and a final short covering spurt at the close put the final close at 1102. But that doesn't mean we've got a new bullish leg coming--there are increasingly tough hurdles to overcome on any continued climb higher.
The Nasdaq closed over the 200-day at 2259 and at a new four-week high but it's still tough to get behind the techs. Several sharp downward revisions in Q3/Q4 earnings estimates suggest tech stocks are going to have a hard time finding a whole lot of buying interest over the next few weeks.
Actual earnings from tech stocks however have been outstanding with bottom line growth of +64% for Q2---unfortunately that is likely to be the high for the year. Thomson Reuters predicts that earnings growth will slow to less than half of that at 30% in Q3 and only 13% in Q4.
The main problem is the tougher comparisons from Q3/Q4 2009 when the economy rallied out of the recession. Unfortunately the economic rebound has slowed so dramatically recently that beating those Q3/Q4 numbers is going to be tough.
And the truth is in spite of good overall numbers quite a few high profile tech stocks missed estimates or gave weak guidance so the tech sector is going to have some stiff headwinds. There are a ton of chip stocks reporting this week so we will have plenty of fresh input to help finalize the picture.
Disappointment was not limited to tech stocks this past week--McDonalds (MCD) reported earnings that beat the street but posted lower than expected same store sales and the stock gave back -2% on Friday. McDonalds is important because analysts look at the restaurant chains for indications of an increase in spending as consumer sentiment improves. They did not find that in the McDonalds report. Beating by a penny and missing traffic number expectations is not confidence building.
Overall this past week earnings took a turn higher after some big disappointments in the previous week. So far the S&P companies have produced earnings growth of +42%-- 12% higher than the estimates just a month ago. More than 78% of those reported have beaten on earnings and 67% have beaten on revenues. These numbers have fluctuated a lot over the last two weeks but now that the majors have reported the trend should weaken as the smaller companies wrap up the season.
The earnings cycle is nearly over. There are plenty of companies left to report but by now we know how the story is going to end. Earnings growth was +42% through Thursday but revenue growth was only 7% indicating companies are still making their numbers based on cost cutting and not new sales. Estimates for Q3 and Q4 are declining so there is little incentive to be long the stock market over the August/September period.
Another reason for Friday's jump higher was the markets were expecting much weaker results from the European banking stress tests--so the positive headline news sparked a strong bout of short covering. Only seven of 91 banks failed the stress test. One German bank failed, one in Greece and five in Spain.
Unfortunately these 'stress tests' don't really show the true picture--Government bonds, and sovereign debt held by European banks were not included and of course that is where most of the risk is centered. Those government bonds are held in what is called a "bank book" and are valued at full value--NOT the current fair market value. These tests were a sham--and no savvy investor will buy into the hype. But the headline looked great and in the short term it had the desired effect.
On the economic front there were only two reports of any real interest this past week. The Monthly Mass Layoff report showed a rising pace of layoff events at 1,647 in June compared to 1,412 in May. The number of workers involved rose to 145,538 compared to 135,789 in May. Employment is critical to ANY economic recovery and rising layoffs are a very negative sign.
The Weekly Leading Index appears to be leveling off a bit despite the big drop in sentiment last week. The index was flat at a reading of 120.7. However the annualized growth rate fell again to -10.5% for the 11th consecutive decline--not a good sign.
The economic calendar was light last week but this week's schedule is full of potential minefields. The two biggest reports are the Fed Beige Book on Wednesday and the GDP on Friday. The Beige Book tells us the economic conditions in each of the Fed regions. This is a monthly report and traders will want to see that conditions are not getting worse--if they are that could have a very negative effect on the markets.
The GDP report on Friday is going to be critical. At the beginning of last week the estimate was for a growth rate of 2.5% for the second quarter but at this point consensus is already down to just 2%. This is the first GDP report for Q2 and estimates were for 4.0% growth just a couple of months ago. Another problem could be a revision to prior quarters. This is going to be a major stumbling block if the GDP comes in lower than expected.
So we've got a three week uptrend still intact, most of the majors already reported, continuing negative economic indicators and an earnings season winding down--the question is...
HOW DO WE MAKE MONEY ON IT?
Now more than ever it's important to pick individual stocks with extremely compelling reasons to move in their respective directions--and we've got two super high-potential candidates lined up to do exactly that.
Our first plays is actually bullish and it's on a uniquely positioned insurance company that just surprised analysts last week with some very positive earnings. The stock shot higher and it looks like this leg higher is just getting started. Fortunately the stock doesn't have to appreciate much for us to make a bundle on the right calls--calls we'll be climbing on board first thing Monday morning!
Our next play is bearish and it's on a construction supply company that just announced earnings--and as you can imagine they hit a wall--down a whopping 91% from last year! This stock is a disaster in the making--the perfect set up for making huge profits on the right puts!
We've got two super high potential plays lined up on a market that's ready to move--so let's get to it...
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