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By Ian Wyatt, None |
BAC | Feb 05, 2009 |
Stocks gave up their early gains yesterday. As I’ve been saying, I don’t think we see much upside until earnings season is closer to the finish line. It looks as though a vote on the stimulus bill may not come until next week. That could give us a double-whammy of upside catalysts.
The Dow Industrials is below support at 8,000. But the S&P 500 is above its support at 825. It seems highly likely that the S&P 500 will test those levels today. It’s important to understand that support is often expressed as a range rather than a specific number. Just because an index or stock moves below support doesn’t mean it’s crashing.
We’ve seen several instances lately where an index moves below support intra-day, but finishes above support. What’s critical is how investors behave when support is breached. And I expect we’ll see that today.
*****Bank of America (NYSE: BAC) has now given up all of the gains from last week’s mini-rally. It seems that investors are concerned about dilution, or outright cancellation, of shareholder value from the next bailout solution.
Of course, we’ve discussed at length how the next phase of the bank bailout will be good for the economy but bad for current shareholders. I would expect that to keep pressure on banks stocks as mutual funds and other institutional investors have to re-align their holdings to account for the worst-case scenario.
*****Technology bell-weather Cisco (Nasdaq: CSCO) reported better than expected earnings. But the stock is off due to its earnings forecast. Cisco lowered its revenue range incrementally. But it’s probably CEO John Chambers’ statement that this is the most challenging environment he’s ever faced that’s got the markets in a funk.
Of course, that shouldn’t be a surprise. We’re well aware that business is challenging right now. But Cisco is very well run company. And investors will absolutely look to it for signs of any stabilization. So when Cisco says it’s tough out there, investors will sell.
*****New jobless claims were worse than expected last week. But again, that’s not exactly a surprise. We all know that layoffs are increasing. And if there’s any improvement one week, the next week will more than make up for it.
Employment is still the number 1 indicator for the economy. And today’s number pushes the overall unemployment rate to around 7.5%. Low-end estimates for unemployment remain at 9%, so there’s no reason to expect an uptick anytime soon.
When rates hit 9% that will be the time to start looking for signs of improvement or further weakness. Until then, the stimulus bill is what will keep investors focused on the future.
*****I’ve been steadily adding to my positions in the Recovery Portfolio. I just bought more shares of my favorite mutual fund. This fund is heavy on healthcare stocks and is also buying top companies that are trading at multi-year lows. The manager of this fund is one of the best, and I’m looking forward to significant gains in the months to come.
Still, my favorite position is my "short Treasury bonds" position. To me, a drop in Treasury bond prices is absolutely inevitable. When Obama goes to fund his stimulus bill, it’s going to mean a huge amount of borrowing in the form of T-bills. And when the U.S. economy starts to recover, which necessarily means inflation picks up, money will flood out of bonds.
Plus, this particular investment is less than 10% from all-time lows. I believe risk is limited to approximately that 10% in the near-term and the upside is better than 50% over the next 12 months. For more information on my $100,000 Recovery Portfolio, please click HERE.
*****The Trademaster Investor Forum: SteadyProfits in a Range Bound Market airs on Monday, February 9 at 6 pm. If you haven’t registered for this free video event, you can do so HERE.
The TradeMaster will be discussing how to trade for profits in the current market. Plus, they’ll be answering your questions. It should be a very informative event. So if you’ve got 30 minutes to spare Monday evening, tune in to the Trademaster Investor Forum: Steady Profits in a Range Bound Market.
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