Archive for the 'Stock Market' Category

Through A Trader’s Eyes Podcast #5 – February 2, 2010

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The Bounce Area?

The Nasdaq has fallen almost 6% from its recent high after outperforming for most of 2009.  The weakness started after Intel reported great earnings and the stock essentially went nowhere.  Then, we had IBM’s earnings.  Same thing.  Last night, we had Apple report earnings and Amazon will report later in the week.  Is the Nasdaq ready to bounce?


You can see from the picture above of the Nasdaq that the breakout we had in late December around 2200 has held in the last two days.  I think the combination of Apple’s earnings, the big Apple release tomorrow, and Amazon’s later in the week could provide a bounce.  Technology is really hitting on all cylinders right now.  But, the market was very overbought when Intel & IBM announced their earnings a few weeks back setting us up for a fall.  We have gone from overbought to oversold in just a few days.  There are definitely some negative fundamental issues to deal with.  But, technology to me is still the place to be.  Perhaps shorting weaker areas like financials against technology makes sense.  I believe the excellent fundamental news and the trickle down from the Windows 7 release will lift tech at some point soon.

Are Stocks Getting Too Expensive?

Most of you know that I’m not a big fan of buying or selling stocks based on P/E levels.  But, I do like to look at them in conjunction with several other indicators to see where they are based on history.  Below is a picture of the S&P 500 (white) with the P/E ratio (price divided by earnings) (green).  According to Bloomberg, the P/E ratio on the combined 500 companies in the S&P is currently 24.55.  Now, most analysts when discussing the P/E ratio use the forward looking P/E.  I think generally that helps them justify in buying expensive stocks at current prices.  They’ll say things like “the P/E ratio based on 2012 earnings…..”  You’ll see from the picture below that the estimated P/E is around 15.  Higher earnings, lower P/E.


In March last year, the P/E ratio went below 10 making stocks cheap.  Yes, actually cheap.  But, are they cheap now?  The graph above goes back to 2004 and you’ll see the P/E ratio averaged about 16 until October 2008.  What’s interesting is that the P/E ratio didn’t go up for the last several years even though the S&P 500 itself was reaching new highs.  In a nutshell, earnings (profits) were keeping up with prices so higher prices were justified.   Obviously, a consistent P/E didn’t stop the market from crashing which is why P/E ratios aren’t the best indicators for valuing stocks.  Now, look at the graph from March 2009 until present and you’ll see that the P/E ratio has been rising at a faster rate than the stock market.  So, stocks are becoming more and more expensive.

So, why aren’t people selling stocks based on this?  It all goes back to what I said at the top.  Investors buy stocks or sell stocks based on the future expectations and cash flows.  And they buy or sell stocks based on their willingness or unwillingness to assume risk.  Most expect earnings this year will be higher which means stocks aren’t as expensive as they seem.  The problem is that I don’t have confidence in any analyst that can tell me how much the earnings of the S&P 500 will be in 2010.  They don’t even know how much earnings will be next month.

This isn’t a call for you to run out and sell stocks.  But, continue to watch what companies are saying and what they are reporting.  If earnings don’t improve as expected, stocks will begin to fall (see Whole Foods & Starbucks a few years ago when their stocks were priced for perfection).  There’s no sign just yet this stock market has topped but certainly stocks aren’t cheap.  With that said, it’s too early to tell if they are too expensive.  As usual, pay attention.

Strike

Intel’s strong earnings on Thursday weren’t that big of a surprise given the fact that Windows 7 is now firmly in place.  After the bell, Intel beat sales & earnings expectations giving the stock a boost.  Barring some short-term pullbacks, this clears the way for higher prices for tech in general.  Windows 7 was released last fall and it’s beginning to trickle through tech land, just like low interest rates and stimulus trickled through the financial system.  Most businesses I know still use Windows XP and skipped Vista all together.  Vista looked different and acted different but was too unstable to run a business on.  In addition, many vendors of software that I used simply weren’t compatible with Vista.  Windows 7 is now Vista without all the bugs.  It’s more secure than XP and basically it’s just time to move on.  It’s becoming harder and harder to even find a new computer installed with Windows XP.  Businesses now have a reason to upgrade.  Microsoft was the bowling ball and some of the pins are Intel, Marvel Technologies, Sandisk, Applied Materials, Texas Instruments, etc.  I expect more strong earnings from these guys as well over the next few weeks.  IBM announces their earnings on the 19th and they should be excellent.  You can get fancy owning individual companies but I still like the ETFs in this space like IGM & XLK.

With strong tech results coming, stronger bank results would add even more life to this impressive bull market.  JP Morgan, Wells Fargo, Citigroup, Morgan Stanley, & US Bancorp all report over the next few days.  Strong results from the financial sector give investors that were hesitant another reason to buy.  As I see it right now, there’s simply no sellers.  Any bad news is being ignored and investors are focusing on low rates, an improving economy, and better news from companies.  I would caution those of you that are under invested and dying to get into this market.  I would be patient and average in because while the light is still very green to buy stocks, the short-term is getting a little overheated.  A lot of sectors and stocks are participating in this rally which is very bullish, but bull markets pause and breathe.  So, in the short-term, be guarded but this bull market isn’t done yet.

Google’s Pain, Baidu’s Gain?

On Wednesday, Google (GOOG) announced it may pull out of China because it had been hit with a ton of attacks that they believe could be coming from the Chinese government.  We know that sensorship is a big deal in China.  Therefore, the Chinese government wants to control what is searched for and said.  This completely goes against Google’s model.  So, it would make sense the two wouldn’t get along.

With that said, so far it is just a threat by Google.  Today, Google dropped about $7 per share while Baidu (BIDU), Google’s Chinese competitor, jumped $52.  These stocks are moving as if this is a done deal.  Google is run by some very smart people and they know leaving China may not make sense.  But, they are big enough and powerful enough to initiate a threat.  Analysts are saying there’s about a 50/50 chance they actually follow through on their threat.  In the short-term, this could cause Google (GOOG) to fall to about $540-$550/share.  If it does, I would add some exposure at that point.  This is a tremendous company that rarely is on sale.  This stock was $630/share just a few days ago.  Getting it $80-$90 off of that high would be a gift.

On the flip side, Baidu (BIDU) tacked on $52 today on this news and is now at its high.  A high it has reached four times since October.  So, before you rush in and by Baidu, I’d first wait to see if this is something that really is going to happen and then secondly determine which company’s a better deal.  My money’s on Google.  But, not just yet.

Too Much Confidence?

There are times when you have to be a contrarian to invest successfully.  Other times, the herd is correct and you need to join them. In a bull market, the overconfident investors are correct.  They are right.  Selling because people are optimistic in a bull market is the wrong move and you should buy from those that are temporarily scared.  On the flip side, a bear market fear is the right mood.  Those who are selling because they are scared is correct.

On the chart below, I have my crazy investor indicator which I post every once in a while.  The middle line is the actual indicator and the bottom line is the S&P 500.  You can see that being scared (middle line at the top) in the fall of 2008 and selling was the right move.  It was not correct to buy the dip as you would have done in a bull market.  Conversely, the summer of 2009 produced a very confident mood on the part of investors (middle line at the bottom) and the market continued higher.

It’s been interesting the last few weeks as the S&P 500 has moved sideways in a tight range the Crazy Investor Indicator has been pretty erratic.  If you squint your eyes, you can see the very right side of the graph shows that we have a lot of confidence on the part of investors (similar to the May June time frame) right now.

This is telling me one of two things:  Either this is a great time to sell because in a struggling market you sell to overconfident people.  Or, things are so good that we’ll simply move higher and the overconfident people are correct.  Because I’m giving you a 50/50 scenario, that means my portfolio is heavy on cash right now.  I need more of an edge than I’m getting.

The internals of the market haven’t been bad.  They’ve been pretty mediocre but I see nobody willing to sell at these prices.  That’s encouraging.  On the negative side, the demand isn’t there either.  It’s a stalemate.  So, when I see overconfident people and a 50/50 scenario, I’m cautious.

There are still plenty of things to buy right now but make sure you have an exit strategy.  I think the turn of the calendar might bring some extra volatility simply because periods of no volatility are usually followed by more than usual volatility.

Going Outside Of The Comfort Zone

The stock market has been moving sideways for over a month now and has basically bored me to death.  We’re either breathing before moving higher or about to roll over.  When I can’t tell, I watch from the sidelines which is what I’m doing right now.

Generally when I’m looking to buy equities, I’m focusing in on a few different areas.  Areas I think have long-term growth and demographics to match.  However, in the last few weeks, there have been some stocks performing very well that aren’t generally in my comfort zone to buy.  Some of those areas are airlines, autos, financials, etc.

I’d consider these trades rather than long-term investments.  But, really, nothing in my equity portfolio can be considered a long-term investment.  We’re just not in that type of environment.  We’re in a “I love it until I don’t” environment.  Remember, the fundamentals are one thing.  But, the prices of stocks are controlled by emotional greedy investors.  That’s why a company like Goldman Sachs goes from $200 to $160 in short order.  So for now, I’m focusing on individual names in various industries for trades.  I’ll get back to my comfort areas of growth when the market makes up its mind on which direction it wants to go.


KARL’S TWITTER (www.twitter.com/karleggerss)

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