Saturday April 25, 2015

$SPY, $STUDY, Again we enjoyed a very profitable week with the Alpha One model portfolio, both through equity appreciation and our day trading activities with the SPY contracts.  The portfolio holdings are beginning to show signs of weakening but none of the Sell rules have yet been triggered so we will continue to hold adhering to the discipline.  The day trading is working well with four profitable trades last week.  I continue to be a little uncomfortable with the market but not yet bearish.  My concerns remain focused on the unrest which is beginning to percolate through on the labor front and the nagging question as to the degree to which corporations can continue to push on cost restraints to bolster earnings. I am beginning to believe that the day is nearer than most think.  No changes to report on either the Major Market Model or the Allocation ranges at this time.

The overall market was mixed Friday, the price surge in AMZN, along with strong post-earnings gains by GOOGL, MSFT, JNPR and SBUX, sent the NASDAQ to another record. Gains in MSFT kept the DJIA in the green in the end. The blue chip index closed with a 21.45 point (+0.12%) gain at 18080.14. However, the overall market wasn’t partying like those big tech stocks. Energy, industrial and financial stocks pulled back ahead of the weekend while small and mid-cap stocks underperformed.

While AMZN, GOOG, MSFT and etc. made the headlines Friday, many semiconductor stocks did poorly. The semiconductor sector tends to lead the economy. So we have to question how strong the economy really is. Is it possible for the economy to grow on the “soft” stuff in a long run, such as cloud and social networks? That also brings the question how big/how high the stock price of AAPL can get. On the “hard” side, sooner or later growth of the iPhone will slow while the potential of Apple Watch is yet to be seen. So the long term performance of the stock is likely to rely on the “soft” stuff, such as Apple Pay, iTune, video and etc. But how much will those “soft” things help stimulate the overall economy?

All eyes will be on AAPL earnings on Monday. Its post earnings price moves is likely to have significant effect on all three major indexes. Overall, it continues to be a stock picker’s market. And besides AAPL earnings, next week is setting up to be a busy one. Q1 advance GDP is due out on Wednesday and on the same day, the FOMC will announce its latest rate decision.

Our friends at FactSet put out an interesting piece on earnings which begs the question, “How much longer can earnings growth be sustained by cost cutting?” If in fact Revenue numbers continue to grow while earnings decline we may have already missed the boat.  

For Q1, More than Half of S&P 500 CompaniesHave Reported Sales Below Estimates to Date

FactSet Street Account Summary - US WeeklyRecap: Dow +1.42%, S&P +1.75%, Nasdaq +3.25%, Russell 2000 +1.25%

Saturday April 18, 2015

$SPY, $STUDY, It is always worrisome when stocks take a dive on Friday, as few investors want to buy the dip ahead of the weekend and a bleeding on Friday tends to extend into Monday. After reaching or getting close to record highs earlier this week, the major indexes were under pressure from all directions Friday. The SPY joined the DIA and the QQQ in Sell Status at the weeks close leaving just the RUT with a short term Buy rating by the Alpha Market Model while our overall asset allocation recommendation remains at 62.5% Long and 37.5% Cash.  There was little to no change over the week in the individual Opinion count of the various trading list which we follow each day.  The total number of Long ratings remained at about 72% of total.  Given the lack of news over the past week I can live with the difference between the two views.

For the second week in a row the book value of the Alpha One Model holdings declined slightly, much less than the market but the overall portfolio gained week over week as the result of the daily option trade.  Over the past week there were five option trades, each a winner.  Three trades utilized BTO Calls on the SPY and two BTO Puts.  On Friday I moved the contract out another month from the May to the June contracts.  Each trade used about $10,000.00 in capital and the weekly profit was a little under $4,300 for the week after trading costs.  Modesty keeps me from quoting the return on capital for this activity.

Although the S&P 500 failed to follow the smaller stocks to fresh highs this week, it didn’t break down either, even after Friday’s selloff. So it is too early to call a correction. The S&P 500 is still in the sideways pattern started at the beginning of March. The March lows in the 2040-2050 area continue to serve as support for the broader market index. Long term uptrend is intact and there are many more earnings due out in the next couple of weeks. Things can change quickly.

Saturday April 11, 2015

$SPY, $STUDY the overall theme for the remained unchanged as the stock market closed out this slow moving week. There wasn’t much momentum but bulls had the upper hand, as the timeline of the Fed rate hike got pushed out to late in the year. The Alpha One model again had a profitable week both on equity appreciation as well as cash profits on the daily Option trading activity.  The Alpha Two model was up nicely as well both on portfolio appreciation plus first quarter dividend payments. 

Stocks have done an impressive melt-up in the past three sessions. All three major indexes are all within one day’s work from their record highs. But a more impressive move was a 14% drop by VIX (12.58) to the lowest level of the year. This suggested that complacency was on the rise. Many investors might have been hoping that estimates had been cut low enough so that stocks would do just fine regardless which ways earnings turn out. Will that be the case? It is hard to tell. For one thing, VIX has not been able to stay under 13 for a long time so far this year. Friday close saw the Alpha Market Model Short Term split 50 -50.  The SPY changed to a Buy at weeks end.  The Asset Allocation recommendation remains at 62.5% Long and 37.5% Cash. 

The overall technical condition for stocks is weakening slightly going into the beginning of earnings season which is not too surprising.  The first quarter earnings surprises came in at about 58% of companies reporting which is a little higher than the ’14 quarterly average of 55%.  That being said according to our friends at FactSet even though the number of surprises is in line with  historic trends the magnitude of absolute gains may be down, which will be less than encouraging for the market.

A quick review of the past five years shows that in each year the first quarter came in with a modest gain while three of the five second quarter results were down slights.  Although bulls have the momentum and the long term trend is up, it wouldn’t be surprising to see a short term pullback or correction during the earnings season.

Will the S&P500 report a decline in earnings for Q1 2015?

FactSet Street AccountSummary - US Weekly Recap: Dow +1.66%, S&P +1.70%, Nasdaq +2.23%, Russell2000 +0.73%

Saturday April 4, 2015

$SPY, $STUDY, What the market is afraid of appears to be a June rate hike. But as that has been talked about so much lately, it is probably not going to make a big difference in the stock market, even if the Fed decides to hike in June. A drop in VIX this week indicated that there isn’t much fear in the market.

Technically, the intermediate term trend remains up. However, the Alpha Market Model short term is Bearish, and there was no change in the recommended allocation level.  Over the short term, watch for support near March lows of the major indexes. Should the March lows (2040 for the S&P 500) give, we could see a new leg down to the 200-day moving averages (2013 for the S&P 500).

There were no equity trades over the past week, the current holdings performed well over the shortened trading week, additionally the two Option trades added to profitability. 

We have refreshed the Master List which has been posted to the Alpha One Model data sheet on this site.  There are some attractive names on the Watch List but remain cautious until the earning season gets underway.  The first 10 trading days of April will be whimsical.

Not really sure what to expect on the earnings front at this time, the data surfaced in the Factset Insight article  referenced below is disturbing to say the least.  I anticipated an impact from the Energy sector as the result of falling prices, but not nearly as significant as the article indicates.  Time will tell.

Largest Cuts to S&P 500Estimates since 2009 due to Energy Sector