Buzz on the Street: Important Levels Into Quarter End
Some of this week's most insightful and timely vibes.
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Monday, March 15, 2010
GE: Bringing A Good Trade To Light?
Dr. Janice Dorn
My firm's "Stock on Radar" this week is General Electric (GE). This stock has formed a bullish ascending triangle pattern. Last week, GE climbed 4.1% on heavy volume. Our proprietary studies have found a good risk/reward opportunity to buy GE on weakness.
If GE can pull back to the $16.50-16.75 area, I will accumulate a long position. If triggered, look to risk a dollar with approximately three dollars of upside potential.
Buy point for GE is the $16.50-16.75 area. Our stop loss is $15.75 with a target of 19.30.
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Follow the profits
Sometimes we get a little carried away talking about esoteric subjects like bulls, bears, supply, demand, moving averages and the like. But if you just want to focus on something real, then look at corporate profits. When they're rising from a low, that's good; when they're flat-lining or declining, that's bad. Pretty simple.
Much of the rally of the past year has been in anticipation of a profit recovery. And now that recovery is actually coming in a bit better than bulls expected, which is why they are able to elbow bears so effectively. ISI Group now figures that corporate profits will clock in at +38.8% for the first quarter (year over year) of 2010, then +42.4% in the second quarter, +36.8% in the third quarter and then +30% in the fourth quarter (against harder comparisons). That would put profits in 2010 up a record 36.1% overall.
ISI's regression model gets its profits forecasts from a combination of unit labor costs, the OECD leading economic indicator, junk bond yields and the yield curve. Using a proprietary formula, they whip this recipe of inputs and forecasts together to create a model that has led profits closely since 1992. Right now the model is running right on target, with a little extra boost from lower-than-expected unit labor costs (i.e., fewer employees and lower wages).
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If profits increase by that much in 2010, ISI analysts forecast they will hit $1.86 trillion by the third quarter of this year, which would be a record by a wide margin, as you can see in their chart, above.
Why is this important? ISI reports that in the 1930s it took U.S. profits 12 years to hit a new high after crashing in the early part of the decade. In Japan's lost decades, it took 16 years.
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In the United States it is now projected that profits will hit a new high in 2010, which is just four year from their prior peak. This information helps us understand that the current rebound is unique in its robustness relative to prior recoveries in the past century, most likely because of the united front put forward by governments and central banks to stimulate on a vast scale.
Tuesday, March 16, 2010
Between The Ticks
Stocks were on the ropes yesterday after an ORB (opening range breakdown on the S&P). However, once the S&P stabbed back up through the level of the ORB, it was blue sky back to the highs.
While the S&P showed a small 5 wave decline from 1153 down to 1141 implying more downside to come, you have to chalk one up for the bulls: the potential for downside acceleration was present on trade below 1139 (the low of Thursday's outside day up).
I was surprised by the turnaround, but then again if there is one truism about the market is that it survives on surprise.
As ostensibly bullish as the turnaround may be, it looks more like option premium crush and chop than not: it looks like an alternating pattern with one group down one day and back the next with the object of crushing put/call premiums and a Friday close at/near 115 SPYder.
Yesterday was an important cyclic turn and last night was the new moon. Did Julius' wife really say, "Maybe you shouldn't go to the Senate today?"
If they keep going up and the S&P powers through 1150, the next date of importance is the anniversary of the Technology Bubble Top on March 24th and then the end of the first week of April.
If there is momentum after expiration then it looks like a quarter end mark up heading into easy earnings comparisons.
The question is if we get an extension will the S&P get to 1230 and a 5/8 Retrace of the prior bear market?
As shown on the charts (from my morning report) of 2003 and 2006, the S&P still must contend with the idea of a one year low to high cycle. The one year cycle has not been repealed and the S&P is up much more on this advance than the other examples.
The tension is on the tape between the one year cycle and money managers desire for a quarter end market. And, if they accomplish the markup, will there be a hangover?
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The Bull That Won't Die...
It's a mirror image of last March. As the market was cascading lower into March 2009, it appeared there was nothing that could stop it. Support areas were inconsequential. This is like a mirror image. When you look at the bullish percent index levels posted earlier, all are positive. That's fine. The bullish percents are positive until they are not, but what is important to note are the risk levels. Risk is very high. And so here we are with time frames aligning, waiting for the key reversal.
If last year plays out in reverse, that key reversal point will begin on the daily chart with a bearish price flip that shows follow-through on the next day. Remember, each TD Sequential Sell Signal must be confirmed by a bearish price flip (a close below the close four bars earlier) and like last year we will need to see the bar immediately following the price flip record a low below the low of the price flip bar for added confirmation. The momentum has been that strong.
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