Investor Stocks #2 | US Financials Boost Market
Investor Stocks Series
Momentum Rider continues with our Strong Investor Stocks Series in this blog and we review last week’s market action.
We had another very good week for our forecasting. Last Sunday’s newsletter predicted a pullback early in the week to test the 50 SMA and then a bounce later in the week. The market pullback lasted through most of Thursday and actually broke down below the 50 SMA to a low of 1,325 on the S&P 500 before recovering some. The upside earnings surprise that we also covered in the Sunday newsletter came from two key US financials and it helped spur on a strong Friday bounce. It was technically important to get back above the 50 SMA and to stay away from the dangerous 200 SMA.
On Friday, both JPMorgan Chase and Wells Fargo reported better than expected profits with Wells Fargo doing it primarily on the back of their mortgage business. These financial beats seemed to give many investors a lot of confidence going forward on earnings’ season and of course the short sellers had to cover when the market surged strongly back above its 50 SMA. The computer program buying also triggered above the 50 SMA.
The net for the week was a slight positive gain. The S&P 500 finished at 1,356 after starting the week at 1,354 and it kept the uptrend rally from early June intact going into this week. The important trendline to hold going forward for the bulls is shown by the green line in the chart below.
Uptrend Rally From Early June Intact for Now
The earnings coming out this week include 80 S&P companies and some key bellwethers like: Coca-Cola, American Express, Bank of America, Microsoft, IBM, and General Electric to name a few. Based on very low earnings’ expectations, this week has a chance for more upside. The primary wildcard outside of earnings will be Bernanke’s testimony in front of Congress. Bernanke has previously warned that if Congress fails to act, the economy could hit a “fiscal cliff,” estimated to be as much as a $720 billion hit to the economy.
That huge $720 billion number comes from the combined expiration of tax breaks on Dec. 31 and automatic spending cuts that will start on Jan. 1, 2013. But Congress’s apparent lack of conviction to act until after the November election is making many investors nervous and economists say it is causing business leaders to hold off on spending and hiring. Bernanke will also probably hint at keeping a QE program as a future option and will reiterate his worries over a slowing and debt-ridden Europe.
On the surface nothing really changed last week because the markets finished close to where they started – middle of the trading range between 1,300 and 1,400. But unlike last week, this week starts with a bullish bias because it is not overbought and extended like it started last week. In addition, MR still believes that earnings season, including this week, will provide more upside earnings surprises to spark mini rallies. Therefore, we will be continuing our Strong Investor Stocks series and recommending longs in the Power Stock Picks section below.
There is a decent chance of retesting the 1,375 July high sometime this week if earnings provide more optimism.
Power Stock Picks – Strong Investor Stocks (July 15):
Several of these strong investor stocks could be entered at better prices on pullbacks but all have the potential for more upside in 2012. Very strong investor stocks hitting near new highs usually head higher. Just be careful if their earnings disappoint because they can come off hard from the top.
Investor Notes:
MR recommends investors continue to remain cautious and lighter on riskier equities until after the longer term financial situation in Europe has more clarity. The short term is back to neutral with the potential for a higher move in earnings season. However, the 200 SMA is getting close so be ready to make some sells if necessary.
Gold and silver have not shown the strength MR anticipated in June and July. At this point silver needs to hold its final support at $27/oz or it could see a big drop. Gold’s key support area is $1,550/oz before creating increased selling. Precious metal investors need to be on watch to avoid a big fall and to free up cash to buy a big selloff if one comes. Both gold and silver are still great long term investments, but pain may be coming if buying doesn’t come very soon.
New Commodities Investor Alert: At some point in the Summer, MR believes that China will hit bottom and will start providing evidence of growth. This will be critical for the base metal and energy commodities and stocks to start moving up again. If the news is better than expected, then the commodities could be very strong late Summer and early Fall up to the election. This forecast is one reason we recently recommended select beaten down stocks in materials, energy, and agriculture. As an aside, China’s just released growth numbers showed that a hard landing is probably not going to happen – just a modest decrease in growth.
Some of our favorites in the commodities area could see 30%+ gains by year end from the current levels. Please refer back to our recent blog covering our top value stock favorites. (http://www.momentumrider.com/8200/top-stocks-to-buy-top-value-stocks-1/)
The caution alert for retirement accounts and investors is still present and will remain for the foreseeable future.
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