Dow and S&P Finish Up With Nasdaq Down
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Your Daily Profit

 

July 24, 2009

 

*****Small-cap Update

*****Is This Rally Sustainable?

*****Taking Profits Everywhere

*****TradeMaster’s Jason Cimpl

 

Fellow Investor,

 

Stocks generally closed up higher today with the Dow and the S&P 500 continuing their upward momentum, but the Nasdaq closing down from yesterday’s close.

 

The Dow closed up 23.95 points to 9,093.24; the S&P was up 2.97 points to 979.26; while the Nasdaq closed down 7.64 points to 1,965.96 after at one point during the day trading down as far as 1,937.64.

 

The Russell 2000, the leading indicator for small-cap stocks, was up 1.99 points to close at 547.84.

 

Small-cap leadership was shown by Horizon Lines Inc. (NYSE:HRZ) up 35%. The Charlotte, North Carolina firm provides container shipping and logistics services focused primarily on foodstuffs, household goods, building materials, and auto parts. Horizon Lines handily beat street estimates: analysts had projected a Q2 EPS of $0.03 while the company actually reported $0.13. The company further reported that much of the difference was from workforce reductions and lower fuel costs.

 

Other small-cap gainers include Align Technology (Nasdaq:ALGN) up 21%; KKR Financial Holdings (NYSE:KFN) up 21%; and ArvinMeritor (NYSE:ARM) up 19%.

 

*****Wow. Huge rally for stocks yesterday and it just keeps chugging along. With the exception of the Nasdaq, all the major indices have now broken above critical resistance levels. For the S&P 500, that level was 956.

 

The question for investors now: Is this a sustainable move, or are we experiencing some kind of a blow-off top?

 

The reason I ask should be obvious. Corporate earnings have come in better-than-expected virtually across the board so far. Only 16% of the S&P 500 that’s reported so far has missed expectations.

 

But we know that expectations were extremely low. And we also know that the rise in earnings we’ve seen is the result of cost-cutting. Only a handful of companies have indicated that revenues are rising. Cost-cuts are essentially a one-time thing. They don’t support improving earnings over the medium- or long-term.

 

Now, the recent rally certainly seems to be fueled by the expectation that companies have turned the corner to improved profitability. And while it’s possible that demand is returning, there’s virtually no evidence to support that.

 

*****Improved home sales numbers are the result of foreclosure pricing and improved bank profits are the result of accounting changes – these are short-term benefits. Auto sales aren’t improving, retail sales are mixed at best and, most importantly, unemployment is still on the rise.

 

So exactly why are stocks rallying?

 

It’s true that confidence in the economy and financial markets has improved. And the fact that companies are able to scratch some profit out of this hard-pan economy is good.

 

But let’s not ignore the bears. There can be no doubt that many short positions were initiated coming into earnings season. The indices were rolling over and oil prices, the key leading indicator for economic growth, were falling. When shorts are forced to cover, it provides fuel for higher prices. I have no doubt that shorts have been buying to cover their positions.

 

But that can only be part of the story…

 

*****Unfortunately, the rest of the story is yet to be written. The S&P 500 just closed above support at 956 for the first time yesterday. It’s going to need to prove it can stay above that level before this rally can be considered the “real deal.”

 

In the meantime, I’ve been using this strength to take some gains off the table. I took 65% and 20% on two stocks at SmallCapInvestor PRO. I took 17% gains on Activision (Nasdaq:ATVI) at Top Stock Insights And TradeMaster Daily Stock Alerts’ Jason Cimpl took 11% on a quick trade in that service.

 

(Note: to find out more about the profits that Top Stock Insights readers are seeing, like ATVI, click here for information on our updated Predictions Issue. Readers are 11 for 14 for the year, or in baseball terms, batting .785. Not bad. Click here for more.)

 

In my view, taking profits is always good. But it is especially important when you’re uncertain about what’s going on in the stock market. Why continue to risk money when you’ve already got profits locked and the outcome is questionable?

 

*****The current bullishness seems to be based on the expectation/hope that the U.S. economy is bottoming right now. And that means growth may be ahead. Of course, that would be growth after a ridiculously deep contraction, but that’s not really the point, not when that contraction has been pretty well priced in.

 

To illustrate the potential for the bulls, here’s an easy to understand analysis by the Wall Street Journal. They’re suggesting that we may be hitting bottom.

 

*****Finally, here’s TradeMaster Daily Stock Alerts’ Jason Cimpl and his weekly market forecast video. Click here to watch the video and find out why the market did what it did this week and more importantly, Jason’s expectations for next week. Click this link to watch the video now or go to trademasterstocks.com/videoreport.

 

*****Please send you question, comments, suggestions or jokes to [email protected]

 

Ian Wyatt

Editor

Daily Profit

 

P.S. I’ve had a few emails from readers asking about financial advisors, and particularly how to check if they’re giving good recommendations. I’m no auditor of advisors, but I can tell there are five funds they’re probably not telling you about, and they should. Click here to find out more about these funds.

 





Posted 07-24-2009 4:16 PM by Ian Wyatt