Sunday, April 8, 2012

Take profits; don't be greedy.

Hello everyone, it’s been a couple weeks since the last update so let’s get started..

-In the last 3 weeks, we have bounced around in a 20pt range in the S&P 500, proving that 1,400 is still a key resistance level we cannot hold above right now.
-With 4 closes above and below 1,400 in 3 weeks, the broad market seems to be getting a bit stalled out here and is waiting for the next catalyst.
-This past week and a half, we have also seen some not as good economic data as the markets would have like to have seen. On top of that, just this past Friday, the Non-Farm payroll number missed expectations by over 80K, coming in at 120K.
-At the FOMC minutes Tuesday, Bernanke hinted at no more liquidity needing to be pumped into the system. The US Dollar rallied on this news as well as the selloff of commodities and equities.

Here is a look at the S&P 500:

Notice how it cannot sustain 1,400 like it sustained 1,300? My viewings are that it is about time for a correction, well overdue.

The S&P mini sold off about 17 handles after the jobs report; coming close to some key support levels I will be watching next week.

Here is a look at the US Dollar Index:

Notice slight run-up after FOMC speech.

In my opinion, to continue the bullish momentum, we need to start off 2nd quarter earnings with a bang, but there could be some issues. Reporting 1st on Tuesday is Alcoa, and I’m going to point out some red flags, even though this stock might look cheap. Looking at their income statement q/q for comparison, 4th Q ’11 was pretty much a disaster, with a net loss. The market demand for aluminum continues to look weak, and Alcoa is going to feel the brunt of this pain.

We saw an initial upward movement in the stock in the beginning of the year due to the broad market rallying. Since this report in January, it has flat lined and looks to go nowhere. Any rally in this name on better than expected reports (better than a loss) may shoot the stock toward 11, but could face resistance. I would stay away.

A look at more fundamentals of Alcoa; Notice also how Profit margins drastically declined, EBITDA/share declined and debt increased. Shares are also down 40%+ since the beginning of last year.

A technical look At Alcoa shows neutral to slight biased to the buy side, though this could be off a bit.

My recommendation would be to not buy this ahead of earnings, or if you want to short, I’d buy long puts, this stock could bounce but then fade and become range-bound under 10 dollars.

Friday we get earnings from Wells Fargo, in looking at Wells and how they have performed just the first three months of this year, you wouldn’t even know that anything happened last year and it was bound to test some new lows. We have seen a nice run and it’s time to take some off of the table. At levels we are at now, being just shy of 35 dollars, those are numbers last seen PRE 2008 crisis. I’m the most bearish on banks and especially large banks because they have a high correlation for the unemployment report and our economic recovery.

Seeing as how the gov’t may want to stop easing (which in my opinion is good for the long run) equity markets do not like that, the majority of Americans base the economy on the stock market and jobs, ultimately what will probably propel Obama to a 2nd term, though rally was due to easy $ for the last three years. I’m really not sure what to expect for the future, meaning next couple years. Will the fed continue to ease? Are we too addicted to narcotics and once they go away, we can’t handle the pain?

I would like to think that at eventually some point we have to suck it up and go through without more rounds of easy fed money and low interest rates. I am not sure when that will occur, but in the meantime that is another reason why I am bearish on banks. We need rates to increase so banks can make $ to lend more $.

Aside from that, Wells Fargo, as I said, had a great ’12 so far gaining 22% and up 40% from November ’11 lows.

Looking at their income statement, profit margin dropped off a bit from the last report, but revenue growth is growing slowly but steadily. If you are looking for robust growth, don’t bother looking into banks right now. Buy and hold in banks still a bit risky as well since they have to go through Basel reserve requirements before anything can be returned to shareholders. If you own any of the large banks right now, I’d take some money off the table, they had a nice run, so don’t get too greedy.

Some more in-depth fundamental analysis on Wells shows that, yes, gross margins and profit margins are up substantially, but cash flows and cash are down..banks are going to need all of the cash/capital they have if the government tightens their reserve requirements again.

Technical analysis on WFC shows sell on both MACD and RSI

The only positive news I saw coming out of the large banks was a few weeks ago when Jamie Dimon, CEO of JP Morgan declared a stock buyback, said his company was very strong. Being a strong supporter of Dimon, and how he carried his company through the crisis very well, whenever he has something to say, usually it means a lot. JP Morgan is the only large bank I might think about buying, but none of the others.

For the week ahead, I do expect to see some selling pressure. The jobs number being the main reason, as well as some other misses throughout last week which investors/traders had plenty of time to digest through this weekend. Remember, it never hurt taking a profit, and we are already up some 20% in the first 3 months of this year: Don’t be greedy. The entire market is not Apple, but at times it may seem like it.

Everyone have a good 1st week starting off the second quarter, and STAY CAUTIOUS. Follow me @peter_eller10 for any updates throughout the day.