The Sabrient Blog

Green Mountain Coffee Roasters Chairman cries “Don’t Let him Go” for Margin Call, Option Review May

Scott Brown, President, Sabrient — Thu, 17 May 2012 16:36:47 +0000

He’s got plenty of cash

He’s got plenty of friends

He drives women wild

Then drives off in his Mercedes-Benz

He’s got a long wick with a flame at both ends

He’s hot

But don’t let him go

Just give him a chance to grow

Take it easy, take it slow

And don’t let him go

Don’t let him go

REO Speedwagon

Green Mountain Coffee Roasters’ (GMCR) founder and former Chairman, Bob Stiller, is arguing “don’t let him go” after his dismissal for having a margin call on GMCR shares that prompted the sale of another $125,000,000 on May 6, 2011. The fact that Stiller needed to borrow against his remaining shares is an interesting story in itself when you realize how much cash he had raised in “insider sales” in the last 12 months.

That is a total of $155,818,504 since March 14, 2011 BEFORE the margin call that required the sale of 5,000,000 more shares at $24.68. Mr. Stiller claims that his stock was margined to pay for a $14,000,000 yacht. I guess the yacht dealer had a problem accepting any of the $155 Million in cash and dispels the theory that “he’s got plenty of cash.” Director William Davis was also caught up in the margin call on May 7, 2012 forcing him to sell 148,000 shares for $3,725,160 just 3 days after selling 400,00 shares on May 3, 2012 for $10,068,000. The bigger problem for Mr. Davis is that his margin account was not properly disclosed to shareholders in what GMCR refers to as “an inadvertent clerical error left the information out of the company’s February 2012 proxy statement.” Keep in mind that Mr. Davis was the chairman of the governance committee and a member of the four-person audit committee. Actually, I can’t help but reflect on the irony of that in light of the concerns raised by Sam Antar, Gary Weiss, myself and many others.

The good news for us is that GMCR was originally recommended as a short October 22, 2010 when we worried about the potential valley below. At that time, investors were just getting a small sampling of the insider selling to follow and a sample of how GMCR would treat “errors” in accounting. In spite of the SEC inquiry that began in September 2010 and continues today, the stock traded as high as $115.98. Along the way, insider selling mounted (just a small sample detailed above); red flags continued to be discussed on March 20, 2011; Sam Antar’s analysis of earnings and inventory problems on May 9, 2011; a hint of the “errors” excuse that has become the rule rather than the exception at GMCR on June 6, 2011; and another reminder of the absurd valuation when GMCR traded above $100 per share on October 6, 2011.

This story of GMCR is still being written and is far from over. For now, Stiller argues that despite the margin account problem created by himself and Mr. Davis that GMCR should follow the “don’t let him go” line and just understand that he needed a yacht and Mr. Davis non-disclosure of his margin account is simply a “clerical error.” Not to mention that the first quarter was a complete disaster. The SEC will have to unravel who and what was known to insiders as they merrily lined up at the sell window in January-March 2012. All of that said, I recommend that we take this opportunity to close the short position for a profit of +21.09% or +13.44% annualized (we had to wait a long time for this one).

Rockwell Collins (COL) is another stock (albeit a much shorter timeframe) I recommend watching closely to take a profit in after being recommended as a short on January 28, 2012. COL broke the support line today that I drew in January when we entered the position. I have studied technical analysis since 1986 and know enough to know that it is far from a perfect science. I recommend taking the +13% profit on any sign of a rebound but would let the profits run if COL continues the daily spiral it has been in since May 1, 2012.

The only option position we have to review in May is Freeport McMoRan Copper and Gold Inc. (FCX). I am recommending that we roll FCX May $40 put for $7.50 and sell the FCX Aug $40 put for $8.20. Recall that we entered the first ½ position at $38.38. The FCX May $40 call will expire Friday allowing us to recognize a profit of $1.42. The FCX $40 put was originally sold for $2.91. In a less volatile market I wouldn’t be opposed to accepting delivery of the FCX shares based on the forward P/E of 6.23, $4 Billion in levered free cash flow, and anticipated yield of 3.5%. Rolling the option to August keeps cash free to take advantage of opportunities we may spot in other stocks and potentially earn an extra $0.70 if our original premise plays out.

Recommendations:

Buy to cover GMCR at the market, Thursday May 17, 2012

Watch COL closely and buy to cover on any sign of a rebound above the support line (I will post a recommendation when I observe this)

Buy to cover FCX May $40 put, sell to open FCX Aug $40 put, allow FCX May $40 call to expire and wait for higher price to sell new call

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Sector Detector: Confused investors are saying, “It’s all Greek to me”

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 17 May 2012 05:24:38 +0000

When something is confusing or incomprehensible, a person might say, “It’s all Greek to me.” Well, that’s exactly what investors have been saying for the past several days—in the market’s inimitable way. Despite promising economic and corporate news in the U.S., the headline risk from Europe has been just too much to bear. It is keeping the bulls at bay, and front and center for an encore performance is Greece.

I guess the Greeks couldn’t stand losing their global limelight to Spain and Italy. Greece is like that pesky cousin who always stops by unannounced to bum a free meal and “borrow” a few bucks (and light up a cigarette in your living room before heading out).

They have not been able to put together a political coalition to run the government, so the likelihood of them having to drop out of the euro is steadily rising. Now we must await another round of elections slated for June 17, while bond rates in Spain and Italy rise. If Greece refuses to make mandated spending cuts after the new elections, which is likely given that anti-austerity candidates are likely to gain even more support the next time around, they may lose their bailout and get kicked out of the euro club. Many experts think such an occurrence would be devastating to the EU and UK.

The resulting weakness in the euro vs. the U.S. dollar has been a negative for U.S. equities and good for bonds. Looking at the U.S. sector iShares this week, Financial (IYF) and Materials (IYM) have been the weaklings, while defensive sectors Healthcare (IYH) and Consumer Goods (IYK) have held up pretty well. The PowerShares US Dollar Fund (UUP) and iShares Barclays 20-Year Treasury Fund (TLT) are both up this week.

But this correction seems like a developing buying opportunity to me. The only question in my mind is how much pain investors will have to endure before the market rebounds.

Bonds have become wildly overvalued relative to stocks. The U.S. 10-year Treasury yield is near its all-time low as money flees Europe in favor of the relative safety of the U.S. So, there is no shortage of liquidity in this country…and the Fed has pledged to make sure it stays that way.

Despite some extremely worrisome developments last week, including European elections, Cisco’s (CSCO) weak report, and JP Morgan’s (JPM) revelation, the market has not cratered and bears have been remarkably tame. Looking ahead, corporate earnings have been strong overall, and companies are carrying strong balance sheets with plenty of cash.

The highly anticipated IPO for Facebook (FB) is nigh, and investors are jazzed. It is expected to start public trading on Friday. Notably, the firm is only paying its numerous underwriters a 1.1% commission, given that there is little in the way of press and exposure the deal needs. There have been several other Internet IPOs recently, including LinkedIn (LNKD), Groupon (GRPN), and Zynga (ZNGA), so the market’s appetite is already whetted for social media companies. Demand for FB has been so strong that the company raised the bottom end of its share price range from $28 to $31.

The biggest chink in the bull’s armor is newly elevated fear of a European meltdown. For now, Germany’s brisk economic growth has balanced the erosion in the at-risk nations to keep the eurozone out of a net recession, but still, seven of the 17 eurozone nations are in an official recession.

SPY closed Wednesday at 132.83. Last week, it lost the strong support it had been enjoying at the convergence of its 50-day simple moving average and the uptrend line. This week it has lost support at the convergence of its 100-day simple moving average and the line of prior support just below 135. Volume is still elevated during this period of weakness. RSI, MACD, and Slow Stochastic are now deeply oversold. There is little in the way of support between here and the 200-day SMA near 128, so an immediate bounce is needed. Given the weak technical conditions, any sign of promising news from across the pond could result in a very strong relief rally.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 22.27. Last fall in the heat of the Eurozone crisis, fear was elevated and 30 was acting as strong support. As fears subsided, VIX finally broke down and it quickly made its way to test support at 20 for about 4 weeks before breaking down further. It got as low as 13.66 during March, but as the market has entered this consolidation period, VIX has been testing support-turned-resistance at 20 a few times. It has now broken out, at least for the moment.

The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday once again at 38 bps. After complacently sitting in the teens last year, it rose to near 60 at the height of the Eurozone crisis in December, but has since flatlined in this mid-level zone near 40 since mid-February.

As a reminder, The MacroReport is Sabrient’s newest product for the investment professional. This is a monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories around the world and their impact on the U.S. economy, along with actionable ideas (U.S. stocks and ETFs) intended to capitalize on a given outcome. Complimentary access is available on our web site through MacroReport InterActive. The inaugural March issue focused on Greece. The current issue focuses on China. The next issue, slated to be released next week, will look at oil prices and the global issues that impact it.

Latest rankings: The table ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score, which employs a forward-looking, fundamentals-based, quantitative algorithm to create a bottom-up composite profile of the constituent stocks within the ETF. In addition, the table also shows Sabrient’s proprietary Bull Score and Bear Score for each ETF.

High Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods. Bull and Bear are backward-looking indicators of recent sentiment trend.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Financial (IYF) stays at the top of the Outlook rankings with a 77, and Technology (IYW) continues in second place with a 73. Industrial (IYJ) and Healthcare (IYH) round out the top four. IYF still has one of the lowest (best) forward P/Es, and it continues to gain support among analysts as the banks re-emerge, despite their vulnerability to Europe’s turmoil. IYW remains strong in its return ratios as margins are high for tech products.

2. Energy (IYE) and Materials (IYM) continue to be hammered by analyst downgrades of earnings estimates, yet they still reflect the lowest (best) forward P/Es. Nevertheless, IYM jumped a bit back up to a fifth place tie on the strength of its current valuation vs. its projected long-term growth rate.

3. Telecom (IYZ) remains at the bottom of the rankings with a dismal Outlook score of 8. It is saddled with the worst return ratios and the highest forward P/E. It is again joined in the bottom two by Utilities (IDU) with an Outlook score of 10. IDU has low long-term growth projections and a high forward P/E, as well as more earnings downgrades.

4. Looking at the Bull scores, Financial (IYF) and Basic Materials (IYM) are the leaders on strong market days, followed by Industrial (IYJ) and Energy (IYE). Utilities (IDU) is by far the weakest on strong days, scoring 42.

5. Looking at the Bear scores, Utilities (IDU) remains the investor favorite “safe haven” on weak market days, scoring a strong 68, followed by Consumer Goods (IYK). Materials (IYM) and Energy (IYE) share the lowest Bear scores, as they have tended to sell off the most when the market is pulling back.

6. Overall, IYF still shows the best all-weather combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 183. IYW is next at 175. IYZ is the worst at 113. IYK and IDU now reflect the best combination of Bull/Bear with a total score of 110, which is both defensive and bearish. Energy (IYE) displays by far the worst combination with a 98, as investors have avoided the sector under all market conditions.

These scores represent the view that the Financial and Technology sectors may be relatively undervalued overall, while Telecom and Utilities sectors may be relatively overvalued based on our 1-3 month forward look.

Top-ranked stocks within Financial and Technology sectors include Invesco Mortgage Capital (IVR), BancorpSouth (BXS), NetEase (NTES), and Demand Media (DMD).

Disclosure: Author has no positions in stocks or ETFs mentioned.

About SectorCast: Rankings are based on Sabrient’s SectorCast model, which builds a composite profile of each equity ETF based on bottom-up scoring of the constituent stocks. The Outlook Score employs a fundamentals-based multi-factor approach considering forward valuation, earnings growth prospects, Wall Street analysts’ consensus revisions, accounting practices, and various return ratios. It has tested to be highly predictive for identifying the best (most undervalued) and worst (most overvalued) sectors, with a one-month forward look.

Bull Score and Bear Score are based on the price behavior of the underlying stocks on particularly strong and weak days during the prior 40 market days. They reflect investor sentiment toward the stocks (on a relative basis) as either aggressive plays or safe havens. So, a high Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods.

Thus, ETFs with high Bull scores generally perform better when the market is hot, ETFs with high Bear scores generally perform better when the market is weak, and ETFs with high Outlook scores generally perform well over time in various market conditions.

Of course, each ETF has a unique set of constituent stocks, so the sectors represented will score differently depending upon which set of ETFs is used. For Sector Detector, I use ten iShares ETFs representing the major U.S. business sectors.

About Trading Strategies: There are various ways to trade these rankings. First, you might run a sector rotation strategy in which you buy long the top 2-4 ETFs from SectorCast-ETF, rebalancing either on a fixed schedule (e.g., monthly or quarterly) or when the rankings change significantly. Another alternative is to enhance a position in the SPDR Trust exchange-traded fund (SPY) depending upon your market bias. If you are bullish on the broad market, you can go long the SPY and enhance it with additional long positions in the top-ranked sector ETFs. Conversely, if you are bearish and short (or buy puts on) the SPY, you could also consider shorting the two lowest-ranked sector ETFs to enhance your short bias.

However, if you prefer not to bet on market direction, you could try a market-neutral, long/short trade—that is, go long (or buy call options on) the top-ranked ETFs and short (or buy put options on) the lowest-ranked ETFs. And here’s a more aggressive strategy to consider: You might trade some of the highest and lowest ranked stocks from within those top and bottom-ranked ETFs, such as the ones I identify above.

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What the Market Wants: Six Weeks, One Day . . . and Still Counting

David Brown, Chief Market Strategist, Sabrient — Tue, 15 May 2012 01:21:29 +0000

A weekend of more election surprises in Europe, as a socialist candidate won a key state vote in Germany, threatening Prime Minister Angela Merkel‘s stance on austerity in the Eurozone. The Greek “leadership” has all but abandoned hope of forming a new elected government, likely requiring yet another vote.

Those European issues combined with new concerns about China’s growth didn’t do anything to mitigate the JP Morgan embarrassing announcement of a new $2 billion trading loss. Unsurprisingly, the market performed poorly yet again today as the S&P 500 fell more than a percent to 1338, its lowest level since early February, extending the streak to six weeks since our last new high.

Market Stats. The worst style/cap last week was Large Cap Growth, losing -1.05%. The best was Small Cap Value, gaining a tiny +0.19%. Utilities and Healthcare, classic flight-to-safety sectors, were the only positive sectors, with each gaining about +0.5% or less. Basic Materials dropped a whopping +2.7%, followed closely by Energy which dropped more than 2%.

Here are the market stats.

Today, not a solitary sector gained anything while the Dow lost 125 points and Nasdaq, 31 points. Financials writhed in the fallout from JP Morgan’s massive trading loss as well as the weakness in most European banks due the Greek impasse and the German election surprise.

Economic Releases. Retail Sales from April will be announced tomorrow but are expected to be only a +0.2% increase compared to a +0.8% increase last month. CPI and Business Inventories also will be released tomorrow but are unlikely to create much stir. Wednesday, we get New Housing Starts, which are expected to be up sharply over last month.

The important Industrial Production release will also be on Wednesday and could generate a little optimism if it is up as expected. Initial Jobless Claims will arrive on Thursday and could spark or spook the market. Finally, Leading Indicators will end the busy week of economic releases, but is unlikely to help much if the earlier announcements haven’t already got the market engine running.

Fortunately, valuations are still attractive in many stocks (see a few below), and our European ETF hedges—IEV, EWP and VGK—were all down nearly 5% or more over the past week and should continue to serve us well as long as the European scene is so muddled.

4 Stock Ideas for this Market

This week, I used the Large Undervalued Growth preset search in MyStockFinder. Here are four stocks worth your attention:

AFLAC, Inc. (AFL)—Insurance
DirecTV, Inc. (DTV)—Consumer Cyclicals
Marathon Petroleum Corp. (MPC)—Energy
Discover Financial Services (DFS)—Banking Services

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)

Sabrient is a leading provider of independent, unbiased, quantitative equity research to institutions, portfolio managers, investment advisors, and hedge funds, as well as to self-directed investors. The firm is poised to take a quantum leap forward with FSYS, a cutting-edge, proprietary platform. FSYS greatly advances Sabrient’s ability to create, build, test and execute powerful strategies.

About This Newsletter

Our goal in this newsletter is to use Sabrient’s quantitative methodology to provide the best hunting ground for styles, caps, and sectors for both longs and shorts – and to provide guidance in areas where you may want to be cautious versus aggressive in your portfolio. Also, this newsletter is for you. So we welcome your suggestions as to information you would like to see included in this newsletter.

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ETF Periscope: Dreams of QE3 Dance through the Heads of the Bulls

Daniel Sckolnik, ETF Periscope — Mon, 14 May 2012 16:42:35 +0000

“Many people take no care of their money till they come nearly to the end of it, and others do just the same with their time.” — Johann Wolfgang von Goethe

If Wall Street was looking towards the first quarter earnings season for a sign that it should resume the same sort of optimistic stance that it had taken earlier this year, it is likely that its gaze is now resigned to look elsewhere.

There is definitely a trend resuming, but it appears to more resemble the tendency to be defensive and sell, rather than to view dips as prime buying opportunities.

Though the majority of companies reported earnings that equaled or exceeded expectations, the bar seemed, based on investor reaction, to be set towards the low side. However, with the resumption of instability emanating from the European sovereign debt crisis, and unspectacular data emerging from the domestic economic front, investors seem to be slumping back into fear and uncertainty as evidenced by increasing levels of volatility in the market.

Global investors seem, to a certain degree, only to be finding cheer when they see and hear signs of various forms of quantitative easing and other versions of stimulus. For the U.S. market, the most recent Fed intervention, in the form of its bond-buying program oddly referred to as “Operation Twist,” was embraced by investors as a poor cousin of the QE3 that was hoped for, but greeted as a relative nevertheless.

Whatever its lineage, that particular source of Fed largesse is due to expire relatively soon.

For the Eurozone, where forms of stimulus are a bit more constrained due to the charter of the European Central Bank (ECB), the brilliant idea of ECB’s current president Mario Draghi to goose the region’s flailing banks with the clever liquidity solution known as the LTRO was successful beyond general expectations.

In fact, it could have been just enough to stem the serious downtrend that hit Wall Street and the European bourses for much of the second half of 2011, and may have been the single strongest ingredient that contributed to the stellar performance of the equity market in early 2012.

Even China has embraced the game heartily, announcing this past weekend that it will loosen its own monetary policy, a gesture attributed to weaker-than-expected economic data that indicated that growth slowed to a degree greater than expected.

So now, with the market showing a greater tendency towards uncertainty than it had as recently as a few months ago, Wall Street will be paying particularly close attention to this week’s Fed minutes.

Not that investors don’t usually parse this data to extreme levels. Certainly, that is the normal condition of affairs. Rather, it is in the reaction to the slight hints and winks that will likely set the course the market will travel into the summer.

At the very least, it shall serve as a contributing factor towards the near-term fate of the market, one that is coupled at the hip with the continuing noise that can be heard from the Eurozone as it reverberates with the sound of deep dissatisfaction among its electorate.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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Rock Solid Yields (RSY): Someone Wants to Buy out AVCA for a 96% Premium!

Ron Rutherford, Corporate Macroeconomist, Sabrient — Mon, 14 May 2012 05:18:43 +0000

Friday we learned that Covington Investments, LLC proposed an acquisition Advocat Inc. (AVCA) at a price of $8.50 per share which represents a 96% premium over last Thursday’s close. Before the opening on Friday, the merger was announced, which resulted in a day’s gain of over 57% for AVCA but far short of the bid and ending the day at $6.82.

Trading volume on Friday was nearly ten-fold over normal trading. This showed considerable interest in this transaction, but considering that the closing price represents another 25% premium to the offer, the markets are tentatively considering this proposal. Either the arbitragers are seeing considerable significant levels of collapse of negotiations or the market has not fully reacted to the 4th proposal by Covington since February 27, 2012.

The RSY Portfolio loves value stocks and while we evaluate stocks mostly on how the markets views values, this correlates with the value that other businesses place on these valuable companies. If this merger goes through, this will be the second position that RSY went long and was bought out, with the first being Lubrizol (LZ). Since AVCA does not have options available, and the next ex-dividend date is June 27 for just 5.5 cents, then this offer looks like a time to reduce our exposure or unload our position. RSY recommends to put in two bids with half the position in each bid (200 from the original 400 recommended). The first being a limit order of 200 shares at an asking price of $7.49 (GTC), and the second being a limit order of 200 shares at an asking price of $7.99 (GTC). If the offer holds for the next few days, the limit price of $7.49 should be easily met as the high on Friday was $7.54 but feel free to lower this if the market continues to be weak, and the limit price of $7.99 would still represent a little over 5% premium to the offer for others that wish to take the risks.

Best regards,
Ronald Rutherford
Corporate Macroeconomist

Full disclosure: The author holds or will hold the stocks mentioned in this edition of Rock Solid Yields.

Disclaimer: The Rock Solid Yield portfolio newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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Hedge Funds Bought These Stocks Recently

Walter Gault, Communications Editor, Sabrient — Thu, 10 May 2012 18:28:01 +0000

By Meena Krishnamsetty (Insider Monkey Editor)

Hedge funds will disclose their end of first quarter holdings next week. However, we can still track hedge funds’ transactions through Form 4, 13D, and 13G filings. We don’t get to see their entire portfolio in these filings but we get to see their recent transactions in their large positions. Here are the stocks hedge funds bought recently:

Apple (AAPL): Dan Loeb’s Third Point previously sold out its position in Apple during the second quarter of 2011. Third Point decided to buy back those shares at a substantially higher price of $445 a share after Apple’s fourth quarter earnings announcement. Here is how Loeb explained his Apple investment thesis in Third Point’s quarterly investor letter:

“As we evaluated Apple at $445 per share, some back‐of‐the‐envelope math painted an intriguing picture. Due to its favorable working capital cycle and deferred revenue contribution, Apple has been churning out cash flow at close to 120% of earnings (actually 128% in FY2012). Looking forward to CY2012, that rate suggests cash flow in excess of $50 per share in 2012. Ignoring repatriation tax for a moment, at $445 per share less $104 per share in net cash, we were creating Apple at 6‐7x CY2012 free cash flow. Looking toward year‐end 2012, with over $150 per share in net cash, Apple’s multiple dropped to 5‐6x CY2012 free cash flow. As a result, we believed we were buying in with a healthy margin of safety, a likely cash return catalyst and a favorable product cycle. This strong cash position and cash flow made the prospect of a cash return strategy very likely. Even allowing for a healthy sense of skepticism, Apple’s close to $100 billion of net cash is greater than that of Microsoft, Google, Facebook and Nokia combined.”

URS Corp (URS): Larry Robbins filed a 13G last week disclosing a 3.9 million share position in URS Corp (URS). Glenview Capital had 3.55 million shares of URS at the end of December.

Oaktree Capital (OAK) is a new favorite for several hedge funds. Greenlight Capital filed a 13G last week, disclosing a 1.68 million share position in Howard Marks’ Oaktree Capital (OAK). Einhorn’s $70 million investment in the company gives him a 5.5% stake in Oaktree Capital. Russell Hawkins’ Hawkins Capital holds an even larger position in the company.

Barnes & Noble, Inc (BKS): You probably heard that Barry Rosenstein’s Jana Partners disclosed a 7 million share position in Barnes & Noble. The stock went up dramatically after the company inked a deal with Microsoft (MSFT). Hours after the announcement, Rosenstein was busy selling 1 million shares of Jana’s holdings at an average price of $24.42 (read the details here).

Zillow (Z) and Yelp (YELP) Billionaire hedge fund manager Steven Cohen disclosed a 5% stake in Zillow and a 5.1% stake in Yelp this week.

Ingersoll-Rand (IR) Nelson Peltz disclosed a 7+% activist position in Ingersoll-Rand this week. Ingersoll-Rand wasn’t a popular stock among hedge funds at the end of December. Mason Hawkins’ Southeastern Asset Management was the only fund we track with a $100+ million position. Nelson Peltz’s current position in the stock is valued at more than $900 million.

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Sector Detector: Elections in Europe put US investors on the defensive

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 10 May 2012 04:21:45 +0000

Last week I noted that there wasn’t much new to say about the stock market and its drivers lately, but like washing your car tends to attract rain, my comments were immediately followed by anger-driven election results in France and Greece. Both of these elections were about a rejection of austerity mandates placed upon a citizenry already feeling severe pain. The thought process is, “If the U.S. can simply print money and spend its way out of trouble, why can’t we?”

Of course, when an economy is thriving, the broad electorate is employed and happy with capitalism and free markets with a dream of potential riches. But when times are hard and austerity looms, the masses at the lowest rungs of the economic ladder suffer the most, lose faith in the system, and begin to demand Socialist policies to guarantee their wellbeing. Class warfare ensues, and politicians who are willing to champion the plight of the vast working class often get elected. Their challenge is finding a way to actually fulfill the Herculean expectations they create.

It comes as little surprise that Greece has chosen this path. But it is somewhat of a surprise to see that this is also the path that mighty France has chosen…again.

Like Francois Mitterand 31 years ago, Francois Hollande was elected on a Socialist platform during hard financial times. He was able to oust Sarkozy by pledging to tax the rich and “reorient Europe towards employment and growth,” thus saving his countrymen from the draconian austerity measures that had been thrust upon them (by Germany). Many experts think that Hollande will not have the ability to change the course of austerity as he promised, which undoubtedly will disappoint the electorate.

The other thing that occurs during times of hardship is a bold emergence in popularity of the fringe elements. In Greece, we see both the Socialist left as well as the militant, anti-immigrant right gaining strength. Yes, while prosperity brings out the best in us like compassion, generosity, and inclusion, distress can bring out the worst in us like distrust, selfishness, militancy, and exclusion. In times like these, many voters flock to the extreme and show little patience for moderates and compromisers. Witness this week’s ouster of long-sitting Indiana senator Dick Lugar. Being known as “Obama’s favorite Republican” didn’t sell well this time.

Looking at our stock market, I see relative weakness in bull-market leaders like financials, semiconductors, commodities, small caps, and emerging markets, as the “risk-on” trade gets peeled back in a hurry. Although there has been ongoing uncertainty in Europe, it had reached a sort of steady-state with which investors had become accustomed. The latest news was a bit of a shock, so the knee-jerk reaction to a surprise news event is to protect capital.

Nevertheless, even with the bears clawing at the door, the cards remain stacked in favor of the bulls. The equity risk premium is still quite high on a historical basis. Corporate earnings season has been strong as over 67% have beaten analyst consensus estimates. U.S. companies carry strong balance sheets with plenty of cash, and they still trade at historically low valuations. The Fed’s accommodative and ultra-low interest rate policies give a pretty big advantage to equities among competing asset classes. And policy-makers in Europe will likely remain as flexible and accommodative as they have been so far.

Of course, the almighty consumer must participate to keep the U.S. recovery in gear. Last week, unemployment data disappointed investors. CNBC’s Rick Santelli gave another one of his forceful live commentaries that made its rounds on the Internet, talking about the media’s complacency in “Ostrich Economics,” whereby they look only at a number like 8.1% unemployment and conclude that things are improving. However, Rick pointed out that the lowest labor participation rate since 1981 has created 80% of the drop in the unemployment rate. The job situation simply must start showing real improvement.

Nevertheless, no matter what the doomsayers suggest, “Don’t fight the Fed” should trump “Sell in May and go away” in the battle of the Wall Street aphorisms. U.S. investors crave more than what bonds, real estate, and gold can offer them right now, so I expect a return to stocks as the smoke from across the pond clears a bit.

SPY closed Wednesday at 135.74. It has lost that strong support it had been enjoying at the convergence of its 50-day simple moving average and the uptrend line. Global events changed the technical picture on a dime…and on some of the highest volume of the year. RSI, MACD, and Slow Stochastic were looking bullish just last week, and now Slow Stochastic is suddenly oversold. SPY is now desperately seeking support at the convergence of the lower Bollinger Band, the 100-day simple moving average, and the line of prior support around 135.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 20.08. Last fall in the heat of the Eurozone crisis, fear was elevated and 30 was acting as strong support. As fears subsided, VIX finally broke down and it quickly made its way to test support at 20 for about 4 weeks before breaking down further. It got as low as 13.66 during March, but as the market has entered this consolidation period, VIX has been testing support-turned-resistance at 20 a few times. It is now doing so again.

The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 38 bps. After complacently sitting in the teens last year, it rose to near 60 at the height of the Eurozone crisis in December, but has since flatlined in a this mid-level zone around 40 since mid-February.

Despite the overall strength in earnings reports this season, many companies with negative ratings on Gradient Analytics’ active coverage list have been the ones to fall the hardest lately. This includes names like Accretive Health (AH), Diodes (DIOD), Fossil (FOSL), Discovery Communications (DISCA), International Rectifier (IRF), and Mettler Toledo (MTD). Afterhours on Wednesday, Universal Display (PANL) reported and immediately sold off.

As a reminder, the latest edition of The MacroReport is out. This is a new monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories and their impact on the U.S. economy, along with actionable ideas intended to capitalize on a given outcome. Complimentary access is available on our web site through MacroReport InterActive. The current issue focuses on China. The next issue looks at oil prices and the global issues that impact it.

Latest rankings: The table ranks each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score, which employs a forward-looking, fundamentals-based, quantitative algorithm to create a bottom-up composite profile of the constituent stocks within the ETF. In addition, the table also shows Sabrient’s proprietary Bull Score and Bear Score for each ETF.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Financial (IYF) stays at the top of the Outlook rankings with an 82, and Technology (IYW) continues in second place with a 72. Industrial (IYJ) and Healthcare (IYH) round out the top four. IYF still has one of the lowest (best) forward P/Es, and it continues to gain support among analysts as the banks re-emerge, despite their vulnerability to Europe’s turmoil. IYW remains strong in its return ratios as margins are high for tech products.

2. Energy (IYE) and Materials (IYM) were further hammered by analyst downgrades of earnings estimates, yet they still reflect the lowest (best) forward P/Es. Consumer Services (IYC) jumped ahead of IYM this week.

3. Telecom (IYZ) remains at the bottom of the rankings with a dismal Outlook score of 5. It is saddled with the worst return ratios and the highest forward P/E. It is again joined in the bottom two by Utilities (IDU) with an Outlook score of 10. IDU has low long-term growth projections and a high forward P/E, as well as renewed earnings downgrades among Wall Street analysts.

5. Looking at the Bear scores, Utilities (IDU) remains the investor favorite “safe haven” on weak market days, scoring a strong 67, followed by Consumer Goods (IYK) and Healthcare (IYH). Materials (IYM) and Energy (IYE) have the lowest Bear scores, as they have tended to sell off the most when the market is pulling back. Notably, their bullish trend of higher Bear scores seems to have taken a pause.

6. Overall, IYF still shows the best all-weather combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 193. IYW is next at 177. IYZ is the worst at 110. IYK now shows the best combination of Bull/Bear with a total score of 112, followed closely by IYF. Energy (IYE) displays the worst combination with a 100, as investors have avoided the sector under all market conditions.

Top-ranked stocks within Financial and Technology sectors include First Merchants Corp (FRME), Invesco Mortgage Capital (IVR), CalAmp Corp (CAMP), Seagate Technology (STX).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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What the Market Wants: April Showers Bring… More Showers

David Brown, Chief Market Strategist, Sabrient — Mon, 07 May 2012 23:27:36 +0000

Today’s trading began amidst a multitude of unpleasant factors. France handed over its leadership to a socialist regime; a Greek election offered no support for current leadership or austerity; Asian markets were down sharply overnight; and European markets continued to exhibit weakness. Fortunately, we had no economic news at the open, but near the market close, consumer debt was released, coming in at more than double the prior month’s reading and far off expectations. While I’m not sure what to think of that, I can tell you that it is not the most stable indicator, as it is frequently revised. The April showers (loss) have led to a very poor opening week for May.

The selling abated throughout the day, with the S&P 500 and the Nasdaq closing up a tiny fraction of a percent while the Dow was off about 30 points.

The market has shown no appetite for much of anything the past 6 weeks. The only sector up for the week was Telecommunications, although not everyone considers it a sector. Our SectorCast was off target last week, but right on target today with Financials, Healthcare, Technology, and Consumer Cyclicals up a tad. Our 30-day forward sectors look very much the same this week.

The worst style/cap this past week was Small-cap Value, down -3.5%. The best was Mid-cap Value, down -1.8%. Clearly, there’s not much help there although Small-caps have been weak over the past 6 weeks.

Valuations remain moderate to attractive. The Top 100 Sabrient GARP (Growth at a Reasonable Price) stocks have a forward P/E of only 7.22 compared 8.23 a year ago. Their P/E (ttm) is 9.72 versus 10.33 a year ago. Of course, these are both higher than March 2009’s low of 5.25 and 5.78 respectively. However, it’s worth noting that net revisers (net analysts revising EPS upward) was -4.72 then, but now it is a sturdy 6.84 (the higher, the better). And, next quarter’s expected growth valuation is a solid 8.10 versus 4.84 a year ago and 1.84 in March 2009. The best reading of that factor since the low was 9.95 in September 2011.

Figures for the Top 300 are bit lower but still better than a year ago.

Only when we get to the Sabrient Top 1000 GARP stocks do we get a higher forward P/E than a year ago, while the trailing PE remains well below (16.8 vs. 18.3). However, next quarter’s projected earnings valuation is much better than it was a year ago.

Looking forward, we don’t get much in way of new news this week: Initial Jobless Claims, Producer Price Index, Michigan Consumer Sentiment, Trade balance, and Pricing data.

So, too early to scream Mayday or run from the market. Just buy well-valued stocks and continue hedging with puts on the European ETFS EWP, VGK and/or IEV, all down around 2% last week.

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the GARP (Growth at a Reasonable Price) preset search in MyStockFinder. Here are four stocks worth your attention:

United Therapeutics Corporation (UTHR)—Healthcare
Stoneridge, Inc. (SRI) — Cyclical Consumer
Western Digital Corp (WDC)—Technology
Gulfport Energy Corp. (GPOR)—Energy

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)

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ETF Periscope: Eurozone Elections Both a Wake Up Call and a Trading Opportunity

Daniel Sckolnik, ETF Periscope — Mon, 07 May 2012 15:13:44 +0000

“Be a terror to the butchers, that they may be fair in their weight; and keep hucksters and fraudulent dealers in awe, for the same reason.” – Miguel de Cervantes

European politics are certain to dominate the conversation among investors this week and should, more than likely, continue to be the focus of attention for the remainder of the month, either directly or indirectly.

In spite of reasonably positive numbers to have emerged from the corporate sector during the course of the current earnings season, it is all but impossible for Wall Street to ignore the present state of its largest trading partner. With over 20% of U.S. exports heading across the Atlantic to Europe, and 14% earmarked directly for the Eurozone, it would be a serious case of ostrich-style denial if investors chose not to notice the unsettling activity in the region.

All it takes is one dysfunctional partner to create a dysfunctional relationship. And with an angry electorate screaming for change, any kind of change, whether it originates from the far right or far left side of the political spectrum, the Eurozone is moving deeper and deeper into dysfunctional territory.

During the course of the past weekend, France’s Sakorsky was unceremoniously given “le heave ho”; Greece’s main parties suffered a serious level of parliamentary attrition; and Germany’s Merkel watched her increasingly fragile coalition travel yet another step in the direction of disassembly.

All of the above actions combine to indicate a strong, if not unexpected, shift in the political fortunes of both peripheral and core Eurozone members. What this means for the market is that the austerity-centered promises of the previous regimes of France and Greece have a high risk of being broken. And, if indeed they are broken, then the viability of the EU comes into question, and the immediate impact upon the economies on both sides of the Atlantic must be considered.

As in any dysfunctional relationship, counseling may be sought, but it is the implementation of the advice that is the only real benchmark of change. In the case of the Eurozone, the primary advice has been to slash budgets and services in the name of achieving the levels of debt-to-GDP ratios that were original conditions of joining the EU club.

Now, however, with Eurozone unemployment hitting double-digit levels of nearly 11%, it seems that the populace of the region is insisting on relief, not austerity.

The bold but short-term relief that the European Central Bank provided to the region’s banks via the recent implementation of LTROs apparently has not directly impacted the citizens of Greece or Spain. So while the problem of banking liquidity may have been addressed by the move, the problems of unemployment and recession have not.

An angry population has apparently decided that it wants to change the direction of the boat. Now it is a question of time as to just what direction the boat shall sail, or even whether it will make it to shore intact.

What the Periscope Sees

Last year, back in June, we were asked by Investor’s Business Daily to recommend a few potential ETF trades. Our answer was to cast a wary eye in the direction of the Eurozone, and to consider shorting the sovereign debt situation via a pair of euro-centric funds. These included VGK (Vanguard European ETF), which tracks the MSCI Europe Index and is made up of the common stocks from 16 European countries, and FXE (Rydex Currency Shares Euro Currency Trust), which measures the relative value of the U.S. dollar against the euro.

Since then, a short on VGK would have yielded 17%, while a short on FXE would have resulted in a 10% gain.

With the current situation in the Eurozone amping up in terms of flux, both of these ETFs still present good shorting opportunities to consider.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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Sabrient’s David Brown interviewed on Money Life

Walter Gault, Communications Editor, Sabrient — Fri, 04 May 2012 17:35:07 +0000

Sabrient’s Chief Market Strategist, David Brown, will be on interviewed on today’s (May 4) segment of the Money Life Show, hosted by Chuck Jaffe. David appears a little after midway through the show.

You can read a summary of the interview here on Market Watch.

David discusses some of his favorite stocks right now, including Seagate Technology (STX) and US Airways (LCC) as well as stocks he recommends selling, including Rockwell Collins (COL) and Hittite Microwave (HITT).

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Sector Detector: Strong earnings balances global worries

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 03 May 2012 05:46:42 +0000

Have you noticed that there hasn’t been much new to say about the stock market and its drivers lately? Bears are weary from calling tops that don’t follow through, and bulls are hesitant to inject more cash until they have a more inspiring catalyst. So, we’re pretty much left to wonder whether the overworked mantra “Sell in May and go away” will be a self-fulfilling prophecy…or a contrarian catalyst for the bulls to get busy again.

The Dow, Nasdaq, and S&P 500 are all holding above round-number support levels at 13,000, 3,000, and 1400, respectively. On Tuesday, the Dow hit its highest levels since December 2007, following a strong ISM Manufacturing Index and strength in China’s manufacturing sector, but it petered out before the day’s end. Riskier small caps actually finished in the red as investors were worried about maintaining the “risk-on” trade. Then Wednesday’s ADP disappointed, but the riskier Nasdaq, mid caps, and small caps were the leaders while large caps languished. Financial and Energy led on Tuesday, but lagged badly on Wednesday.

Yes, there’s a lot of confusion during this period of technical consolidation, so investors are grasping for any sort of sign, omen, or directional catalyst. Now they await Friday’s Government Employment Situation report. Bulls are hoping for a green light to renew the surge…or at least a reason to continue holding the line until the next catalyst.

Speaking of holding the line, the SPY is still getting reliable support at the convergence of its 50-day simple moving average and the uptrend line shown on the chart. SPY closed Wednesday at 140.33. RSI, MACD, and Slow Stochastic are showing higher lows and bullish divergences.

If you also pull up the weekly chart (not shown), SPY remains in a persistent uptrend since the October double bottom, with strong support from the uptrend line and a bullish crossover of Slow Stochastic.

Although unemployment, GDP growth, and consumer confidence have been loath to improve, the market has held its ground, bolstered primarily by corporate earnings reports that have been quite good – led by the likes of juggernaut Apple (AAPL).

Despite the preponderance of earnings beats, many companies with negative ratings on Gradient Analytics’ active coverage list have been the ones to tumble in the wake of lackluster earnings reports. Accretive Health (AH) is the poster child, falling more than 50%. Others include PAREXEL International (PRXL), Alere (ALR), Magellan Health Services (MGLN), Iconix Brand Group (ICON), Netflix (NFLX), Silicon Laboratories (SLAB), Wipro Ltd (WIT), Rockwell Collins (COL), and Gentex (GNTX). Among the handful of stocks getting positive grades from Gradient, Six Flags Entertainment (SIX) and Aspen Technology (AZPN) have given strong reports. This demonstrates the value in an expert team of forensic accountants like Gradient’s.

Green Mountain Coffee Roasters (GMCR) is another getting slammed after a disappointing earnings report. It was down over 40% in afterhours trading on Wednesday. Starbucks (SBUX) previously jilted GMCR’s K-cups in favor of privately-held Krueger. Now the chairman says he can’t predict sales effectively. He also reported falling margins, rising coffee prices, and reduced guidance. Gradient Analytics has been pounding the table about accounting and earnings quality issues at GMCR for quite some time. The stock rose to near $116 last year, but Gradient was warning that insiders were dumping shares in a big way. It’s now trading back below $30.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 16.88. It seems to be comfortable in this 16-18 range. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 39 bps, where it has flat-lined since mid-February. Both readings are positive for stock bulls.

As a reminder, China is the subject of this month’s edition of The MacroReport, which is a new monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories and their impact on the U.S. economy. The MacroReport offers a unique combination of global market commentary and analysis with specific actionable ideas.

The April issue considers three scenarios driven by a combination of circumstances and events in China, and concludes with a series of economic factor-based ETF portfolios and “Quick Response” U.S. stock choices intended to capitalize on each scenario. Complimentary access to all of this is temporarily available on our web site through MacroReport InterActive. Next month’s subject will be oil prices.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Financial (IYF) stays at the top of the Outlook rankings with a 80, and Technology (IYW) continues in second place with a 71, although Industrial (IYJ) and Healthcare (IYH) are in hot pursuit at 70 and 69. IYF still has one of the lowest (best) forward P/Es, and it retains support among analysts as the banks re-emerge. IYW remains strong in its return ratios as margins are high for tech products. IYJ has been climbing on the strength of analyst earnings upgrades.

2. Energy (IYE) and Materials (IYM) continue to be beaten down by analyst downgrades of earnings estimates, yet they still reflect the lowest (best) forward P/Es. IYE in particular has been falling precipitously in the rankings.

3. Telecom (IYZ) remains at the bottom of the rankings with an Outlook score of 10. It is saddled with the worst return ratios and the highest forward P/E. It is again joined in the bottom two by Utilities (IDU) with an Outlook score of 17. IDU has low long-term growth projections and a high forward P/E, as well as renewed earnings downgrades among Wall Street analysts.

4. Looking at the Bull scores, Financial (IYF) has been the leader on strong market days scoring 57, followed closely by Materials (IYM) and Industrial (IYJ) at 56 and Technology (IYW) at 53. Utilities (IDU) is by far the weakest on strong days, scoring a lowly 35.

5. Looking at the Bear scores, Utilities (IDU) remains the investor favorite “safe haven” on weak market days, scoring a strong 67, followed by Consumer Goods (IYK) and Healthcare (IYH) at 62. Materials (IYM) shows the lowest Bear score of 45, followed by Industrial (IYJ) at 48, indicating that Materials and Industrial stocks have tended to sell off the most when the market is pulling back. But both scores continue to move higher each week, which is a bullish trend. And Energy (IYE) has risen to a 50.

6. Overall, IYF still shows the best all-weather combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 189. IYW is next at 179. IYZ is the worst at 112. IYF shows the best combination of Bull/Bear with a total score of 109, followed closely by IYW, IYK, and IYH. Energy (IYE) displays the worst combination with a 99, as investors have avoided the sector under all market conditions.

Top-ranked stocks within Financial and Technology sectors include VMware (VMW), Innodata Isogen (INOD), Discover Financial Service (DFS), and Citizens Republic Bancorp (CRBC).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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What the Market Wants: April Showers Dampen Market Rally

David Brown, Chief Market Strategist, Sabrient — Mon, 30 Apr 2012 23:34:20 +0000

Despite last week’s little rally, April showers have dampened market. While it didn’t build into a torrential downpour, it steadily showered investors with worse-than-expected economic data, including last week’s dreadful Durable Goods Report (-4.2% compared to last month’s +1.9%), continued but minor increases in initial jobless claims throughout April, and a disappointing initial Q1 estimate of GDP (+2.2% compared the previous quarter’s +3.0%).

Europe didn’t add any sunshine during April due to increasing worries over Spain, the other PIIGS, and last week’s unanticipated resignation of the Dutch Prime Minister. Today’s Personal Spending increase of only +0.3%, versus an expected +0.5% and last month’s +0.9%, drowned a more favorable yet anemic Personal Income Report; and the Chicago PMI of 56.2, compared with last month’s 62.2, didn’t help. Will reports later this week from Construction Spending, Auto and Truck Sales, both ISM Indices, and Factory Orders let a little sunshine through or even bring May flowers?

Unsavory investigations swirling around giants such as Walmart de Mexico; Apple (AAPL), with the spotlight on the poor working conditions of its Chinese manufacturing partners; and a number of new, nasty litigations between tech stalwarts, including Google (GOOG) and Oracle (ORCL), hasn’t generated positive reviews from Wall Street Analysts; nor did the media’s persistent, unfavorable reviews of Wall Street itself or poor reports from Goldman Sachs (GS), among others.

Will the showers turn into thunderstorms in May? Will new investigations and lawsuits follow as the lawyers gleefully line up to sue or defend? Or will the showers give way to sunlight if positive earnings surprises continue to outpace negative ones? If the latter happens, investors will surely realize that, despite its warts, the market is still the only place to generate adequate returns in the face of bond inflation risk and a real estate market sagging under an overbuilt burden of everything from houses to office buildings to shopping malls.

Gold and silver may still have some shine left, but the risk/reward ratio of shiny metals has certainly reached lofty heights while stock valuations remain quite reasonable against historic ranges (cheap, in fact, in various pockets).

For those of us who are still finding nuggets in the “stock” piles (see today’s ideas) and attracted by shorting or purchasing puts in the European ETF hedges that include EWP, VGK or IEV, we should probably focus our attention on well-priced Growth stocks, favoring Large- or Mid-caps over Small-caps (despite last week’s strong Small-cap performance of +3.01% that outperformed Large-cap Growth stocks gain of 1.90%). The most undervalued sectors according to our SectorCast are Financials, Healthcare and Basic Materials. The outlook is not so hot for Non-cyclical Consumers or Utilities. Good luck in May!

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the GARP (Growth at a Reasonable Price) preset search in MyStockFinder. Here are four stocks worth your attention:

Gran Tierra Energy, Inc. (GTE)—Energy
Pan American Silver Corp. (PAAS)—Basic Materials
Seagate Technology (STX)—Technology
AGCO Corporation (AGCO)—Industrials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)

About This Newsletter

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ETF Periscope: As Wall Street Eyes Earnings, This is a Good Time to Place a Bet on Eurozone

Daniel Sckolnik, ETF Periscope — Mon, 30 Apr 2012 15:23:47 +0000

“One’s destination is never a place but rather a new way of looking at things.” — Henry Miller

Investors seemed to have regained their collective mojo, powering the S&P 500 Index (SPX) back up to the 1400 mark for the first time in three weeks. The upward move by SPX was fueled mostly by better-than-expected first quarter earnings, which increased the bottom line for the benchmark index by 1.8% on the week.

Will 1400 now serve as a new level of support or morph once again into a hard line of resistance? It has been over four years since the SPX has spent any sustained amount of time over that level. At the moment, it would likely require a significant alignment of the stars for 1400 to become the new support line.

What would such an alignment look like? Certainly, a continued stream of positive earnings would be a requirement. This is a possibility, because the bar of expected earnings seems to be leaning towards the low side. So this aspect of the equation seems as if it could happen.

The next required ingredient for a rising equity market would be positive numbers on the domestic economy. The first quarter drop in the GDP to 2.2% from last quarter’s 3% obviously reflects a certain level of cooling of the economy, though both consumer consumption and consumer confidence showed higher numbers than the previous month. This week’s economic report on jobs could serve as the tipping point in regard to how investors view the health of the U.S. economy.

However, what must be heavily weighted in the equation is the fate of the Eurozone. This past week investors seemed to look past the current signs of further problems developing in the troubled region. Spain has replaced Greece as the poster child for sovereign debt concern. With a significantly larger economy and with a number of other Eurozone banks retaining a high level of exposure to Spanish debt, Spain has emerged as a much larger concern to both regional and international investors.

Standard and Poor’s just downgraded Spain’s debt several notches, blaming the probability of Spanish banks defaulting as the cause of that action. In addition, the unemployment rate now stands at a whopping 24% overall. Worse still, this number is dwarfed by the nearly 50% of unemployment that exists for those under the age of 24. These are simply unsustainable numbers, as are the rising bond yields that Spain is now forced to pay for credit.

The dilemma that Spain now faces is one of austerity verses growth.

It is a reoccurring theme among the Eurozone countries, and one that the current round of regional elections is attempting to address. The problem is, either option is merely a symptom of the EU’s structural problem, not a cure. Investors will probably see increased risk in the region, no matter how the current situation plays out.

What the Periscope Sees

With the market currently in a slight upswing bringing down volatility levels as reflected by a drop in the VIX, this is an opportune time to take advantage of the lower price levels of the “fear index” and pair it up with a proxy for the Eurozone situation. By going long a VIX derivative such as VXX, and pairing it with one for the Eurozone, such as EWG (iShares MSCI Germany Index Fund), you can benefit if the market continues to ignore the sour Eurozone picture while also having a strong hedge, via VXX, should the Eurozone resume its unraveling process.

Note, please, that in this case, both components of the pair are “long.”

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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Market Forces – Stock World Weekly

ilene, Guest Blogger, Phil's Stock World — Sun, 29 Apr 2012 18:26:29 +0000

Here’s the latest Stock World Weekly: Market Forces. Enjoy!

Please give us feedback.

Features this week include:

Technicals by Mark Hanna
Discussion of HFT by Washington’s Blog
Trends by Allan Trends (charts and the big table)
Sea of Cash by Lee Adler
Pharmboy and Phil’s trade ideas

Excerpts:

TECHNICALS with Mark Hanna:

This week, the indexes broke through the tops of their boxes. The carbon and silicon-based life forms controlling the trading scene are now free to run the Risk-Off trade to new heights. As Mark observed on Thursday,

“Looks like people are jumping on the upside bandwagon again as the S&P has cleared those highs of 1392-1393 at the ‘top of the box… Keep in mind Bernanke has us in a “Tepper moment” again. [Sep 24, 2010: Video - Appaloosa's David Tepper - Ben Bernanke Will Make Everything Go Up in the Can't Lose Environment]

“Either the economy gets better, or the Fed comes in with guns blazing. Either scenario the stock market “wins” in simple think… [Apr 1, 2012: Is it Really as Simple as Don't Fight the Fed?]…

“Mr. Bernanke said the Fed ‘remains prepared to do more’ to help the economy should there be further deterioration. We don’t know what will trigger QE3, but it’s clear it’s still out there.

“Technically now one can use the ‘resistance becomes support’ thesis, and S&P 1392ish is the line to work against.” [Clearly We've Broken Out of the Box to the Upside]

[Mark’s disclosure notice: Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund's holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog]

HFT TRADING with Washington’s Blog

Addressing the proportion of silicon to carbon-based traders, Washington’s Blog reported, “As of 2010, 50-70% of all stock trades were done by high frequency trading computer algorithms. And many other asset classes are dominated by high frequency trading as well.

“High-frequency trading distorts the markets. See this and this. It lets the big banks peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, and this.

“Morgan Stanley has just shown (via the Financial Times) that the percentage of high frequency trading in the stock market has skyrocketed to 84%:

‘Trading by “real” investors is taking up the smallest share of US stock market volumes [since Morgan Stanley started keeping track 10 years ago.]

‘The findings highlight how US trading activity is increasingly being fueled by fast turnover of shares by independent firms and the market-making desks of brokerages, many using high-frequency trading engines. [All of the market-making desks are using it.]’”

According to Morgan Stanley’s research, “The proportion of US trading activity represented by buy and sell orders from mutual funds, hedge funds, pensions and brokerages, referred to as ‘real money’ or institutional investors, accounted for just 16% of total market volume in the form of buying, and 13% via selling in the final quarter of last year… (Full article 84% of All Stock Trades Are By High-Frequency Computers… Only 16% Are Done By Human Traders)

TRENDS - Allan Trends

Once again the VXX Long signals were quickly reversed as the market climbed higher last week.

The patterns playing out with the stock market indexes are not as unanimous, and considering the “big picture,” equal weight needs to be given to all the indices.

The principle of trend following is to be on the right side of the dominant trend of the market. What we see above is a clear downtrend in volatility, VXX, while a mixed bag of signals in the equity indices. I would be more comfortable going Long the market here if all-of-the-above were in alignment. Although this weekend, it looks as though that is where we are headed, we are not there yet.

Gold and Silver rose into the end of last week, but both remain in dominant downtrends. These two can offer tremendous gains as they trend extremely well and there is a host of leveraged instruments to play the trends. Three day of rally was not enough to turn these trends Long, but they are setting up a trading opportunity by either triggering fresh Long trends, or hitting the trend lines and resuming their downtrends with a vengeance.

For a risk-free trial, click here for Allan’s standard service; or here for his premium service. The premium trading service is for active/day traders.

SEA OF CASH by Lee Adler

Looking ahead, will the latest index break outs from Mark Hanna’s boxes endure? Will Allan’s signals turn uniformly to LONGs? Lee Adler of the Wall Street Examiner discusses this question in “Tide About to go Out On the Sea of Cash.” His analysis casts doubt on the idea that the stock market will soar to new highs.

Courtesy of Lee Adler.

The massive $50 billion Treasury bill paydown that the dealers and other holders received on April 16, augmented by a much more modest $3 billion paydown last week was enough to keep the markets floating upward on a sea of cash. But the tide is about to go out.

Monday, the players must settle $54 billion in new notes and TIPS auctioned last week. From now until mid June, when estimated quarterly income taxes will be collected, there will be no more paydowns. Every other week, another wave of longer term paper will buffet the market. This is a normal feature of the calendar every year, which is one of the reasons why “sell in May and go away” works so well year in and year out.

Last year the Fed exacerbated the problem by taking a wait and see attitude after QE2 wound up. Ben will not make the same mistake this year.

The public, as indicated by bond mutual fund flows, is still buying bonds like mad. By holding short term rates at zero, Bernanke is forcing old people to take ever increasing duration and credit risk.

The first wave of Bernankecide through the forced drawdown of savings accounts and money market funds will be followed by a second wave when the elderly face massive capital losses in their bond mutual funds. This massive ongoing loss of purchasing power is a drag on the economy. Bernanke has never addressed the issue because the question hasn’t been asked exactly in those terms.

Tax receipts through mid April were much stronger than last year, but that party appears to be over. Tax receipts have fallen rapidly over the past 10 days, so that they are now barely above last year’s pace in real terms. I may be jumping the gun, but if this continues it will indicate that the economy has stalled again. That will spell bigger than expected Treasury supply. (Tide About to go Out On the Sea of Cash)

Note: This section is part of the Wall Street Examiner Professional Edition Treasury Market Update, available to WSE subscribers and being made available to us this week.

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News & Views: “The Pain in Spain: More Room for a Short ETF Bet?”

Kassandra Bentley, Managing Editor, Sabrient — Fri, 27 Apr 2012 17:33:55 +0000

“The Pain in Spain: More Room for a Short ETF Bet?”

Sabrient’s Daniel Sckolnik was quoted at length in this article by Ronald Fink in Institutional Investor:

With Spain the latest euro zone member to inspire fear among sovereign bond investors, exchange-traded funds that invest in the country’s equities are seen as a profitable means of shorting its debt.

Daniel Sckolnik, a senior analyst for Santa Barbara, California–based research firm Sabrient Systems, cited three ETFs in a recent Periscope column in its weekly investment newsletter: VGK (MSCI European ETF), IEV (iShares S&P 500 Europe 350 Index Fund) and, as Sckolnik put it, “for those who want to go for a more laser focus,” EWP (iShares MSCI Spain Index Fund).

Click here for the full article.

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Dark Horse Traders’ Hedge: LCC and COL Help Getting in Tune; Short HBI

Scott Brown, President, Sabrient — Thu, 26 Apr 2012 18:48:28 +0000

US Airways and Rockwell Collins Help Getting in Tune; Short HBI

I’m singing this note ‘cause it fits in well

With the chords I’m playing

I can’t pretend there’s any meaning here

Or in the things I am saying

But I’m in tune

Right in tune

The Who

US Airways Group, Inc. (LCC) stock received a 16% boost last Thursday on news of union support for a merger with bankrupt American Airlines (AMR). Fortunately, we have had long exposure to LCC since being recommended on January 28, 2011. On June 9, 2011, we elected to wait for another day to re-enter the buy/write position. Well, “I can’t pretend there’s any meaning here, But I’m in tune,” because this is just what we were looking for and “I’m singing this note ‘cause it fits in well.”

US Airways Chairman and Chief Executive, Doug Parker, said “We are pleased to report significantly improved first-quarter financial results in spite of record-high fuel prices,” in the carrier’s financial results statement. “Consumer demand for our product remains very high, resulting in record-high first-quarter revenue, load factor, yield, and PRASM.”

LCC reported a profitable 1^st quarter Thursday. The company also commented on $1.2 Billion in annual savings and added revenue they believe could be achieved through the proposed AMR merger.

The action we want to take to get “right in tune” is to enter the buy/write exposure to the long position we already hold (entered January 28, 2011). If you don’t already hold a long position in LCC, then you should add one-half the number of shares you would like to have exposure to as a long purchase. I recommend sell to open the LCC $10 Sept Call (LCC120922C00010000) for approximately $1.46 and sell to open the LCC $10 Sept Put (LCC120922P00010000) for approximately $1.47. This will provide us exposure to the other one-half position in LCC and yield $2.95 in premium until September 2012, putting us “Right in tune.”

I wanted to provide a quick update on Rockwell Collins (COL), to which we recommended short exposure on January 28, 2012. COL recently announced Q2 earnings and again benefited from a $14 million warranty-reserve reversal to meet estimates of $1.09. Without this reversal COL would have reported $1.03. The company reported lower revenue and guided lower for FY2012. I continue to feel that the forward earnings quality is unsustainable, and reiterate short exposure on COL.

I also recommend adding short exposure to Hanesbrands, Inc. (HBI) to put us “in tune.” HBI’s recent earnings announcement beat their lowered estimates. I have many concerns with management’s cash flow forecasts. Management would like to see free cash flow of $400-500 million, allowing them to pay off $300 million of debt in 2012. Additionally, they would like to have pension contributions of $30-35 million and $45 million in CapEx. HBI has done a poor job of forecasting free cash flow the last 2 years, and I don’t expect this year to be any different given the quality of earnings issues.

These positions should help keep our Dark Horse Traders’ Hedge “right in tune” with the market.

Recommendations:

Sell to Open LCC $10 Sept Call at the market.

Sell to Open LCC $10 Sept Put at the market.

(If you don’t already have one-half long exposure to LCC, buy to open LCC at the market).

Sell to Open HBI at the market.

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Sector Detector: Apple lends support to a nervous market

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 26 Apr 2012 04:17:33 +0000

Apple. Need I say more?

Well, perhaps just a few more words are in order. With markets showing concern about renewed debt worries and recession in Europe and signs of economic slowing both in China and the U.S., Apple (AAPL) stepped up to the earnings plate and smacked a grand slam on the first pitch. It pulled up its shades at the poker table and offered up a royal flush without taking another card. It stood at the microphone in the finals of American Idol and delivered a virtuoso performance without a single pitchy note, dog. It…well, you get the idea.

Indeed, AAPL had pulled back quite a bit of late, falling 14% from its 52-week high of $644 in just two weeks, as many investors felt that the stock’s price had run so far so fast this year that it would be hard-pressed to have anything to say that would ignite further enthusiasm. But the company came through with flying colors, showing 59% year-over-year sales growth and 94% profit growth…and the stock rose an incredible 9% on Wednesday to close back above $600 and gain nearly $47 billion in market cap in just one day. In fact, there are only about 100 U.S.-listed stocks having a total market cap larger than what Apple gained in just one day.

Not to be outdone, Fed Chairman Bernanke got in on the act, stating that inflation remains subdued, the ultra-low fed funds rate will stay put, and the Fed stands ready to take additional stimulative actions as needed to keep the economy on the path of recovery

With Uncle Ben in their camp and AAPL leading the way like Rudolph in a blizzard, bulls took it as a green light to resume putting cash into stocks. Last week, I discussed the imminent June expiration of “Operation Twist,” and how all stock gains for the past three years have come during Fed stimulus programs. So, bulls were encouraged to hear Chairman Bernanke hint that more is in store.

The Dow, Nasdaq, and S&P 500 are again well above key support levels at 13,000, 3,000, and 1370, respectively. With AAPL composing over 11% of the Nasdaq Composite and over 17% of the Nasdaq 100, it comes as no surprise that these were the biggest gaining indexes on Wednesday, up 2.3% and 2.7%, respectively. And with AAPL making up over 21% of its assets, the iShares Dow Jones U.S. Technology Sector ETF (IYW) was the sector leader, up 3.1% on Wednesday.

Among the 10 U.S. sector iShares, Energy (IYE) and Materials (IYM) have been the overall leaders this week through Wednesday, followed closely by Financial (IYF), Technology (IYW), and Industrial (IYJ). These five sectors carry the highest Sabrient Bull scores (as described below).

Beyond Apple’s blow-out quarter, earnings season has been generally positive, albeit against low expectations. Of course, there have been many exceptions, and Gradient Analytics’ in-depth forensic accounting research has been out in front of a number of blow-ups, with negative grades on names like Accretive Health (AH), Iconix Brand (ICON), Netflix (NFLX), Silicon Laboratories (SLAB), Wipro (WIT), Rockwell Collins (COL), Mattel (MAT), Cepheid (CPHD), Quest Diagnostics (DGX), and Gentex (GNTX). AH got hit particularly hard on Wednesday, falling more than 40% in one day. SLAB and ICON were each down about 15%. Any portfolio manager (particularly long/short) who is not using Gradient research is missing the boat, IMHO.

As a reminder, China is the subject of this month’s edition of The MacroReport, which is a new monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories. The MacroReport offers a unique combination of global market commentary and analysis with specific actionable ideas. The April issue considers three scenarios driven by a combination of circumstances and events in China, and concludes with a series of economic factor-based ETF portfolios and “Quick Response” stock choices intended to capitalize on each scenario. You can download a complimentary copy at Sabrient’s institutional web site (http://www.sabrient.com/institutional.php).

SPY closed Wednesday at 139.19. It is holding on to support at the convergence of its 50-day simple moving average and the uptrend line shown. The false breakdown of this support was quickly reversed, and in fact SPY has now broken above the upper line of a symmetrical wedge that has formed during April. RSI, MACD, and Slow Stochastic are all pointing up bullishly.

I have been reading various suggestions of a foreshadowed weakening of the U.S. economy due to the historical correlation of stocks with prices of things like oil and milk, both of which have weakened lately. However, if the market can hold on and definitively break out of this technical consolidation, there is more upside in store.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 16.82. It has been rebuffed several times by strong resistance at the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 38 bps, where it has flat-lined since mid-February. Both readings are positive for stock bulls.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Financial (IYF) stays at the top of the Outlook rankings with a 79, and Technology (IYW) continues in second place with a 74. IYF still has one of the lowest (best) forward P/Es, and it retains support among analysts as the banks re-emerge. IYW remains strong in its return ratios as margins are high for tech products, but it is strong across the board on all relevant factors, with the exception of analyst upgrades, which is only modest. Also, Industrial (IYJ) has moved into third place. This is a bullish top three.

2. Energy (IYE) and Materials (IYM) continue to be beaten down by analyst downgrades of earnings estimates, yet they still reflect the lowest (best) forward P/Es.

3. Telecom (IYZ) remains at the bottom of the rankings with an Outlook score of 5. It is saddled with the worst return ratios and the highest forward P/E. It is again joined in the bottom two by Utilities (IDU) with an Outlook score of 11. IDU has low long-term growth projections and a high forward P/E, as well as renewed earnings downgrades among Wall Street analysts.

4. Looking at the Bull scores, Financial (IYF) and Materials (IYM) have been the leaders on strong market days scoring 57, followed closely by Industrial (IYJ) at 56 and Technology (IYW) at 51. Utilities (IDU) is by far the weakest on strong days, scoring a lowly 32.

5. Looking at the Bear scores, Utilities (IDU) remains the investor favorite “safe haven” on weak market days, scoring a strong 66, followed by Consumer Goods (IYK) at 62. Both scores are lower than last week’s. Materials (IYM) shows the lowest Bear score of 41, followed by Industrial (IYJ) at 47, indicating that Materials and Industrial stocks have tended to sell off the most when the market is pulling back. But both scores are higher than last week’s. And Energy (IYE) has risen somewhat to a respectable 48. These are somewhat bullish developments.

6. Overall, IYF still shows the best all-weather combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 187. IYW is next at 179. IYZ is the worst at 105. IYF shows the best combination of Bull/Bear with a total score of 108. Energy (IYE) now displays the worst combination with a 95, as investors have avoided the sector under all market conditions.

Top-ranked stocks within Financial and Technology sectors include Seagate Technology (STX), Google (GOOG), Huntington Bancshares (HBAN), and Ocwen Financial (OCN.)

Disclosure: Author has no positions in stocks or ETFs mentioned.

About SectorCast: Rankings are based on Sabrient’s SectorCast model, which builds a composite profile of each equity ETF based on bottom-up scoring of the constituent stocks. The Outlook Score employs a fundamentals-based multi-factor approach considering forward valuation, earnings growth prospects, Wall Street analysts’ consensus revisions, accounting practices, and various return ratios. It has tested to be highly predictive for identifying the best (most undervalued) and worst (most overvalued) sectors, with a one-month forward look.

Bull Score and Bear Score are based on the price behavior of the underlying stocks on particularly strong and weak days during the prior 40 market days. They reflect investor sentiment toward the stocks (on a relative basis) as either aggressive plays or safe havens. So, a high Bull score indicates that stocks within the ETF have tended recently toward relative outperformance during particularly strong market periods, while a high Bear score indicates that stocks within the ETF have tended to hold up relatively well during particularly weak market periods.

Disclosure: Author has no positions in stocks or ETFs mentioned.

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Housing Data: Shiller Unaware Bernankinflation Winning

ilene, Guest Blogger, Phil's Stock World — Wed, 25 Apr 2012 16:15:11 +0000

Housing Data: Shiller Unaware Bernankinflation Winning

Courtesy of guest author Lee Adler of the Wall Street Examiner

Poor Robert Shiller is behind the curve

There were two major housing data releases today. One of them is important. The other was a misleading misdirection play, that is leaving its creator clueless.

Due to its peculiar and excessive smoothing methodology, the housing Case Chiller is always behind the curve. It uses a 3 month average of sale prices closed in the 3 months up to the last reported month, in this case December, January, and February. That means that the data represents the average price of contracts closed over a 3 month period with a time mid point of mid-November. Need I remind you, it is now the end of April. The Case Chiller data represents the market more than 5 months ago.

This would be like the Wall Street Journal reporting only the Down Jones Industrial Average 65 day moving average as of November 16. Really, who gives a crap about what the 3 month average of the Dow was 5 months ago? Do you? I didn’t think so. So why pay attention to the Case Chiller?

This is totally worthless data, yet the media continues to report it as if it means something.

Actually, there was a third release today. The Federal Housing Finance Agency (FHFA aka Foofah) monthly price index was also released today. The Foofah data is not quite as slow. It uses sales only from the last available month which in this case is February. It at least recognized that a turn took place for sales closed in February.

The Conmerce Department released its new home sales data. This is really crappy data because it uses a tiny sample survey that gets revised every month for 5 months until the sample size is statistically significant. That being said, it does have certain advantages, and the revisions have not been so large that they change the absolute direction of the index.

The new home sales price data, while more volatile than the ultrasmooth and useless Case Chiller, uses contract prices from the previous month, not closed sales from two, three or four months ago that went under contract two months before that. It is the most current index of actual contract selling prices, released with a lag of just a month. Trends can be isolated by deriving year to year changes. Median and average annual price changes in new home sales have shown consecutive steep increases in both the February and March data.

New House Sales Price Chart- Click to enlarge

I watched an interview of Robert Shiller today. It was painful. He seemed confused and uncertain about what’s going on. Due to the painfully slow data collection and excessive data smoothing of the index bearing his name, Shiller has missed the turn. Professor, the supply demand equation has two parts. Low prices have cause supply to be withdrawn from the market, bringing it into equilibrium with historically weak demand. Bernanke inflationary policies are causing house prices to inflate, just like oil prices. Housing is a necessity. When it’s as cheap to own as it is to rent, and there’s too much free money around, guess what? Prices for necessities rise.

New house median sales prices were up 6.3% year over year in March. That was the second straight year over year increase. The new house average sale price was up 11.7%, also the second straight increase. Average price is skewed by product mix. The market isn’t up 11.7%, but it’s the direction and consistency of the data that’s important.

The NAR’s data for March showed its second straight monthly increase, at +5.7% for the month, with a year over year increase of +2.5%. And now the FHFA shows slight a year to year increase for sales closed in February mostly contracted in December, the weakest month of the year.

Current, real time national listing price indexes (Housingtracker.net) have shown excellent predictive value in reflecting in real time the direction of the lagging closed sale data. They have shown year to year increases since December and are up 3.7% year to year through this week. In March, at the time corresponding with the March new home sales contract data, they were also up 3.6%. In January, at the time corresponding with the NAR’s March closed sales data (on average, January contracts) they were up 2.9%. The NAR’s corresponding closed sales data showed an increase of 2.5%. A wide variety of data is consistent in showing year to year increases in prices for the first time without the benefit of tax giveaways, or pending increases in FHA fees.

Actual, not seasonally fudged, builder new house inventory was revised down for each month from November to February. At 144,000 units, builder inventory is now at it’s lowest point in 50 years. That is not a typo. Five oh. The records only go back to 1963.

Furthermore, existing inventory is being made obsolete at a breakneck pace as the scary bogeyman called “shadow inventory” removes houses from the market through locational, physical, and functional obsolescence faster than they can be placed on the market. Shadow inventory is like shadow boxing. It isn’t going to hurt anyone, except the banks and institutions that own them, and ultimately the US taxpayer, who will be forced to pay for the banksters’ losses because Fannie and Freddie guaranteed most of those loans.

The new home sales actual inventory to sales ratio at 4.5 is the lowest since August 2005. Demand is historically weak, but supply is now aligned with that fact. An uneasy equilibrium has been reached.

New House Sales Chart- Click to enlarge

New House Inventory Since 1963- Click to enlarge

Completed units in inventory were revised down 3 of the last 4 months. At 48,000, completed unit inventory has never been even remotely close to being this low.

Not seasonally adjusted actual monthly sales were revised up for all months November to February. That is the first time I’ve seen that in 7 years of watching this data closely. Sales are still extremely weak historically, but tight supply and Bernanke’s unholy suppression of interest rates are reigniting inflation. Shiller says that housing will stay depressed for a generation. I’d fade him. If anything, prices will surprise to the upside much sooner than anyone thinks.

Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!

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What the Market Wants: Walmart-Gate

David Brown, Chief Market Strategist, Sabrient — Tue, 24 Apr 2012 00:12:20 +0000

Walmart-Gate, Dutch-Gate, Netflix-Gate, Exit-Gate!

This could be the “exit gate” but probably not. Over the weekend, the New York Times released a blockbuster story about Walmart’s (WMT) alleged massive cover-up of serious violations of the U.S. Foreign Corrupt Practices Act involving more than $24 million dollars in bribes to accelerate store openings and bypass permit and zoning practices. The stock was down 4.55% today, at $59.54.

Netflix (NFLX), after meeting estimates, indicated that growth would be slow in future quarters, sending the stock down more than 15% in aftermarket trading.

The Dutch Prime Minster offered to resign after budget talks collapsed over the weekend. The move could cost the Netherlands its AAA credit rating and put increased pressure on Europe’s sovereign debt crisis. Further worsening the Europe issue, Sarkozy failed to win France’s presidential election, forcing him into a runoff with Socialist Francois Hollande, whom he trails in most polls by substantial margins. Hollande seems determined to undermine the Eurozone pact to protect the sovereign debt of the PIIGS. Some weekend! I don’t recall a weekend with an overall worse picture on so many fronts.

Apparently, the market felt the same way, with the S&P 500 falling nearly 20 points shortly after the open, but then recovering a bit throughout the day to close down about 12 points or nearly 1%. The SPY is now down nearly 5% from its high on April 2.

But again, this is hardly enough to cry “run for the exits.” Today’s earning announcements were more positive than negative by far. This week, nearly a third of S&P 500 companies will report first quarter earnings, so today’s trend must stay in place with no whoppers to avoid serious damage. In addition, this week’s economic releases must include no big negative surprises. Consumer Confidence tomorrow must be stable; Durables Good orders on Wednesday must be okay; Initial Jobless Claims on Thursday should at least hold steady; and then finally, on Friday, the advance GDP number for Q1 must be inline (2.5% is expected), and Michigan Consumer Sentiment needs to confirm tomorrow’s expected reading.

If all of that comes off, along with some stability in Europe, we could rally back a bit, but if we get any bombshells, the exit gates are waiting. Meanwhile, there are still bargains out there. Some of them are being seized by insiders (see below), and we remain convinced that hedging, by shorting some combination of the European ETFs VGK, IEV or EWP, is one reasonable way to build a portfolio for this environment.

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the Insider preset search in MyStockFinder. The following stocks have high insider purchases, and you may find HUM and POL particularly interesting with their earnings dates on the horizon.

Humana Inc. (HUM)—Healthcare (Earnings reported April 30)
Actuant Corporation (ATU)—Industrials
RLJ Lodging Trust (RLJ)—Cyclical Consumer
PolyOne Corporation (POL)—Basic Materials (Earnings reported May 3)

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)

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ETF Periscope: A French Connection To the Eurozone’s Fate

Daniel Sckolnik, ETF Periscope — Mon, 23 Apr 2012 15:54:10 +0000

“He who controls others may be powerful, but he who has mastered himself is mightier still.” – Lao Tzu

There is no doubt that this week will be strongly impacted by the sheer volume of S&P 500 companies reporting earnings over the course of the coming week. However, the longer term direction of Wall Street is more likely to be impacted by Sunday’s election in France.

Investors will definitely be paying close attention to the corporate earnings reports that will be announced by about one-third of the S&P 500 companies throughout the week. So far, earnings season has been regarded as upbeat, as the majority of reports have come in slightly above expectations. Should this trend continue, Wall Street might resume its Q1 rise, based more or less on the fundamentals of the market.

However, even positive corporate numbers may not be enough to trump the perception of risk that investors hold of the Eurozone situation.

On Sunday, France goes to the polls to vote on a new president. The expectations are that Nicolas Sarkozy will end up in a runoff with the more left-leaning Francois Hollande, and a May 6^th runoff shall follow.

What is of significance to investors in this election is not just who will end up steering France’s government, but what it represents to Europe on the larger scale.

If Hollande is the ultimate victor, it means that the French electorate is responding to, among other things, his calls for more taxes on the rich to help generate an increase in government-sponsored jobs, as well as his position that there should be fewer budgetary cuts. In other words, more growth, less austerity.

This is, to a large degree, the same drama that is being played out in Greece, as well as Spain. With the majority of the PIIGS (Portugal, Ireland, Italy, Spain and Greece) either in recession or tottering on the precipice of one, the issue of growth versus austerity is now the predominant question of the day. How the French elections play out may serve to give an accurate read on the direction the EU shall be heading.

If the austerity advocates continue to prevail, the result might be additional bailouts to Greece, Portugal, and Ireland, and future bailouts for Spain and Italy. If pro-growth advocates assume power in the next round of elections throughout the Eurozone, then lenders may balk at providing additional funds and defaults become inevitable.

The International Monetary Fund (IMF) has just secured pledges of an additional $430 billion from the leading world economies. That brings to over one trillion dollars the amount that the IMF now has to shore up the potential liquidity and sovereign debt issues within the EU.

In spite of that staggering figure, the Spanish bond market still suffered. Its 10-year bonds hit the 6% level, hardly a ringing endorsement for the future of Spain’s economy. The fact is there may simply not be a large enough amount of money available to sustain the current form of the Eurozone. The structural changes, which are probably required to create a viable EU, may be beyond what investors are willing to support.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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Sector Detector: Financials top the forward rankings as bulls stay bold

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 19 Apr 2012 04:50:54 +0000

After an almost straight-up run for the first three quarters of the year, stocks are no longer making it quite so easy of a decision to stay long. Nevertheless, the bulls seem to be holding strong in their conviction. Apple (AAPL) has been a leader throughout, but even during that recent 5-day stretch when money was pulling out of Apple, it hasn’t necessarily gone to cash–it’s just shifting to other sectors, including cyclicals like Caterpillar (CAT). Moreover, the Dow Jones Transportation Average has been strong.

This continues to suggest to me that the downside is limited—so long as the Bernanke-driven supply of free money continues. As a reminder, although there is currently no quantitative easing program in place, the Fed launched “Operation Twist” last October whereby it sells $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds in an effort to depress yields on longer-term bonds (while maintaining ultra-low short-term rates) with the intent of incentivizing consumer and business to borrow and spend by pushing down interest rates on loans and mortgages.

This program is scheduled to end in June 2012. Because all stock market gains since the March 2009 V-bottom have occurred during Fed stimulus programs, it is quite possible that the market will stall or even selloff in June when Operation Twist ends. But for now, the stage is set for further gains.

Individual and institutional investors as well as corporations are all still sitting on historically high reserves of cash. As fear stays low, the cash has been finding its way into the markets, including corporate stock buybacks and acquisitions.

Earnings season kicked off last week, and so far the number of companies beating earnings estimates and giving positive guidance has been quite high. For example, Seagate Technology (STX)–Sabrient’s top pick in its “Baker’s Dozen” top stocks for 2012—just gave a fine report, and Wednesday it hit a new 9-year high and finished the day up nearly 4%.

Reported revenues are harder to manipulate than earnings, but the year-over-year consensus estimates on top-line growth are not very challenging as analysts have been quite conservative. So, I expect more good news this season.

That leaves European sovereign debt issues and growth concerns in China as the main things that could derail the bull train.

As for Europe, it is now Spain that has emerged front and center, so when Spanish bond rates rise, the markets get more fearful. Since early March, the 10-year yield has risen from 5.0% to 6.0%–with 6% seemingly the dividing line between manageable and unmanageable debt payments. On Monday, the yield rose above 6% and stock markets sold off. On Tuesday, yields fell and markets rose spectacularly. (For comparison, U.S. 10-year notes yield about 2% and Germany is near 1.7%.)

Still, although the ECB has kept the liquidity spigot open to Spain’s advantage, many observers believe that there is no avoiding an eventual bailout of Spanish banks, and they say that Italy (with a GDP 50% larger than Spain’s) will be close behind. No doubt, Germany has benefited from the EU in that the weaker economies can’t devalue their currencies against the Deutschmark like they used to, since they all use the euro now. But the flipside is that Germany is responsible for supporting the bailout of their EU brethren.

As for China, last week the country reported weaker year-over-year GDP growth of only 8.1%–down but still quite robust. Of course, the Chinese government will do everything in its power to avoid a hard landing scenario, but also with a measured effort to prevent it from overheating. Perhaps the biggest threat in this regard is a potential real estate bubble.

Of note, China is the subject of this month’s edition of The MacroReport, which is a monthly co-publication of Sabrient Systems and MacroRisk Analytics, providing an in-depth analysis of the macroeconomic trends in focus territories. The MacroReport offers a unique combination of global market commentary and analysis with specific actionable ideas. The new issue considers three scenarios driven by a combination of circumstances and events in China, and concludes with a series of economic factor-based ETF portfolios and “Quick Response” stock choices intended to capitalize on each scenario. It will be posted on Sabrient’s web site on Monday.

In addition, The MacroReport will introduce this month a valuable interactive component that is available to all subscribers. MacroReport InterActive provides a ”Quick Response” to major economic shifts on a daily basis and gives access to the most current revisions and adjustments made to its optimized ETF and stock portfolios.

SPY closed Wednesday at 138.61. It is holding on to the 50-day simple moving average and the longer-term uptrend line (which I have drawn slightly different from previous weeks). A failure here might take it down to test its 100-day MA. However, RSI, MACD, and Slow Stochastic have all turned back up after cycling down (as oscillators are supposed to do).

This pattern of rising peaks and troughs is a key trait of an uptrend. I still believe that any significant pullback would be a major buying opportunity.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 18.64, after recently testing resistance at the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 40 bps, where is has flat-lined since mid-February. Both readings are positive for stock bulls.

Both the European Central Bank and the U.S. Federal Reserve have the ability to prevent a run on banks by ramping up their printing presses whenever necessary. Such a policy is ultimately inflationary, driving up asset values—and the main beneficiary likely would be the Financial sector.

As property values rise, the real estate market recovers, loans perform, and bank equity rises. As inflation increases and bonds sell off, long-term interest rates rise. Couple this with the Fed’s ultra-low short-term rate policy (i.e., banks’ cost to borrow), and it points to improving margins for banks. As we’ve seen in Sabrient’s SectorCast quantitative model, the Financial sector has been rising up the rankings—and in fact, this week it tops the list.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Financial (IYF) has emerged at the top of the Outlook rankings with an 82, with Technology (IYW) holding its own in second place with a 77. IYW is still strong in its return ratios as margins remain high in tech products, but it is strong pretty much across the board on all relevant factors. Its score has been dropping lately as analysts have back off on upgrading earnings estimates. Instead, IYF has garnered the most support among analysts as the banks continue their Phoenix-like rise.

2. Energy (IYE) and Materials (IYM) continue to be beaten down by analyst downgrades of earnings estimates, and they reflect by far the lowest forward P/Es.

3. Telecom (IYZ) remains at the bottom of the rankings with a 2 Outlook score. It is saddled with the worst return ratios, ongoing analyst downgrades, and the highest forward P/E. It is again joined in the bottom two by Utilities (IDU) with an Outlook score of 19. IDU has low long-term growth projections and a high forward P/E.

4. Looking at the Bull scores, Financial (IYF) and Materials (IYM) have been the leaders on strong market days, scoring 57, followed closely by Industrial (IYJ). Utilities (IDU) is by far the weakest on strong days, scoring 32.

5. Looking at the Bear scores, Utilities (IDU) remains the investor favorite “safe haven” on weak market days, scoring an impressive 69, followed by Consumer Goods (IYK) at 66. Materials (IYM) shows the lowest Bear score of 39, followed by Energy (IYE) at 44, indicating that Materials and Energy stocks have tended to sell off the most when the market is pulling back.

6. Overall, IYF still shows the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 191. IYW is next at 182. IYZ is by far the worst at 103. IYF and IYK show the best combination of Bull/Bear with a total score of 109, followed closely by Consumer Services (IYC). Energy (IYE) now displays the worst combination with a 91, as investors appear to be shunning the sector under all market conditions. (Note: Not so long ago, investors were doing the opposite–i.e., they were sticking with Energy stocks under all market conditions.)

These scores represent the view that the Technology and Financial sectors may be relatively undervalued overall, while Utilities and Telecom sectors may be relatively overvalued based on our 1-3 month forward look.

Top-ranked stocks within Technology and Financial sectors include VMware Inc. (VMW), TESSCO Technologies (TESS), Visa Inc. (V), and MSCI Inc. (MSCI).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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What the Market Wants: Technology Stocks Under Siege

David Brown, Chief Market Strategist, Sabrient — Mon, 16 Apr 2012 23:33:38 +0000

Here we are again wondering what the market wants. Today, it clearly wasn’t Technology stocks, as various issues dragged both Apple (AAPL) and Google (GOOG) lower. Apple has been hurt by the likelihood of rising supplier costs from its Chinese supply chain related to the poor working conditions issue. In addition, the Federal Government, along with 15 states, announced an anti-trust suit against Apple and a number of book publishers for price collusion. If successful, the suit would lower e-book prices, favoring Amazon and hurting Apple due to its alleged collusion with the book publishers.

Google, meanwhile, faces a significant lawsuit of its own from Oracle over its alleged use of Java technology in Androids. Separately, the FCC fined Google over its alleged violation of privacy rights from its Street View service. And if all of that was not enough, institutional shareholders are raising concern over Google’s 2-for-1 stock split last week, since the new shares will not carry voting rights.

Since both Apple and Google have recently hit new highs, it is not that surprising that these issues, which in total are unlikely to have very serious effects on either company, could indeed generate a wave of profit taking.

It was a bit of an odd day with the DJIA up 70+ points and the NASDAQ losing over 23 points while the S&P 500 “sat” there finishing nearly “dead even” (-0.7%). But it does conclude another week of losses for the S&P, now nearly 3% off its high two weeks ago of 1422.

Globally, we’re still faced with a lot of “small” problems. Although none by itself is a cause for alarm, how many times can you say “small problem” before the aggregate “small problems” become a large problem? Spain continues to flounder with bond yields rising back to dangerous levels. Stability in Egypt is wavering. Ditto for Afghanistan and Pakistan. After last week’s embarrassing rocket launch failure, Korea may decide that it needs to prove its competence by testing another atomic device. There’s a lot to worry about but still a paucity of alternatives to the equity markets for decent returns.

Valuations still seem reasonable against historical norms. Basic Materials and Financials are both oversold due to legitimate concerns that may have driven their respective sector prices too low. Consider the strength in today’s Financial sector led by Citigroup (C), up nearly 2%, despite missing all their numbers, and last week’s strong reports by JP Morgan (JPM) and Wells Fargo WFC).

Today’s retail sales report for the retail group was pleasing, rising 8% versus an estimated 0.3% and last month’s 1%. With corporate cash still at record levels, it is likely that we will see continued acquisition’s such as Merck’s (MRK) move today to buy Endocyte’s (ECYT) rights to Vintafolide, a new cancer drug in trials. The price tag was about $1 billion! Our forward-looking sector model’s top three are Financials, Healthcare and Basic Materials.

The remainder of this week will include a plethora of big-name industries across the board. Tomorrow morning, includes Ameritrade (AMTD), Goldman Sachs (GS) and State Street (STT) from the Financial Sector, and Johnson & Johnsons (JNJ) from Healthcare. While under siege, the Technology sector will feature releases from Intel (INTC), IBM, Seagate (STX) (a Sabrient Baker’s Dozen 2012 pick), and Yahoo (YHOO).

Economic releases this week feature most of the housing industry data, industrial production tomorrow, initial jobless claims and the Leading Economic Indicators on Thursday.

While we await the reports of this week and the weeks to come, we continue to seek undervalued large- and mid-cap stocks and recommend hedging with European ETFS such as VGK, IEV, and/or EWP.

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder with an added focus on recent upward analyst revisions:

HollyFrontier Corporation (HFC)—Energy
Chemtura Corporation (CHMT)—Basic Materials
Discover Financial Services (DFS)—Financial
Delta Airlines (DAL)—Industrials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

Editor’s Note.

David Brown, chief market strategist for Sabrient Systems, is a former NASA scientist, retired CEO of Telescan, Inc., and author of four books on investing. (More about David)

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ETF Periscope: Wall Street Regains Case of the Jitters

Daniel Sckolnik, ETF Periscope — Mon, 16 Apr 2012 15:30:44 +0000

“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand. ” – Sun Tzu

The cockiness that has been on display from Wall Street for much of the year seems to be on the wane.

For a while, specifically for the first three months of the year, investors seemed to shrug off any negative news, instead taking every opportunity to buy the dips and ride the trend. Sentiment seems to have shifted in April, however, and the skittishness that was the hallmark of the second half of 2011 has re-established itself, to a certain extent, as soon as the second quarter of the year came into being.

The Eurozone debt crisis has seemingly reasserted its prominence on the trading floor. The lull that was established, primarily due to the effects of the temporary banking liquidity solution provided by the European Central Bank’s LTRO-1 and 2, has apparently dissipated. Instead, it has been replaced, as of last Friday, by the jolt of increased bond yields in the Eurozone’s periphery markets. Specifically, Spain’s 10-year bonds hit 5.93%, dangerously close to a level that is euphemistically referred to as “unsustainable.”

Taken together with the fact that China has just demonstrated what many economists have already, that it is as susceptible to an economic slowdown as the rest of the planet, investors are rethinking their happy faces towards the equity markets. A first-quarter drop in the world’s second largest economy from 8.9% to 8.1% GDP tends to have that sort of unsettling effect.

How did Wall Street handle this adversity? Not so well.

The Dow Jones Industrial Average (DJIA) lost 1.6% last week, its biggest fade in over three months. The S&P 500 Index (SPX), offering a better read on the market as it represents 500 companies as opposed to the 30 that compose the Dow, got dinged as well, to the tune of 2% on the week. Finally, the Nasdaq Composite (COMP) trumped them all, shedding a nasty 2.3%.

For the coming week, it will be telling to see how investors view the market. Will it be seen through the prism of an opportunity to cash in the chips on a profitable year to date, or a chance to buy the pullback?

One x-factor is China’s decision to widen the yuan band. This apparent effort to enhance its currency’s flexibility can be read in a variety of ways, covering the spectrum from a move to transparency all the way to the other side where suspicions lurk as to real motive of a government that has been notoriously unconcerned with accommodating the demands of its global trading partners.

If good news emerges from the next round of corporate earnings reports, the yuan announcement may simply get relegated to the back of the curio shop, at least for now. On the other hand, if more bad news comes out of the peripheral countries of the Eurozone, and U.S. economic data begins to illustrate a loss of steam in its recovery, then China and its currency maneuvers may come under harsher scrutiny for no other reason than the fact that uncertainty loves company.

What the Periscope Sees

It’s probably safe to say that a huge amount of retail equity investors are unfamiliar with China investments. Aside from the rare high-profile name such as Baidu, Inc. (BIDU), the Chinese language Internet search giant, the China market remains mysterious. With the recent news regarding the expansion of the yuan band, however, together with a lot of news coverage focusing on the drop in China’s GDP, it may be a good time for traders and investors to familiarize themselves with some trading vehicles from that region of the globe.

Here are trio of ETFs that have been successful so far for the year. However, if a correction starts to become obvious in the market in general, then these may become prime candidates to go short.

HAO, China Small Cap ETF, tracks the AlphaShares China Small Cap Index. It is currently up over 14% for the year.

GXC, SPDR S&P China ETF, tracks the S&P China BMI Index. It is up nearly 12% year-to-date.

Finally, EWH is up over 12% for the year, and tracks the MSCI Hong Kong Index.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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A Macro View: Potential Stock Picks Based on ISM Manufacturing Report

Ron Rutherford, Corporate Macroeconomist, Sabrient — Fri, 13 Apr 2012 21:09:43 +0000

The experts got the general directions of the ISM reports correct this last month. While there is no break-out indicating increased overall strength of the economy or the return to the dreaded double-dips, both reports showed consistent growth, which should translate into economic growth of over 3.5% in GDP annually according to Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. The economists surveyed, predicted that the ISM manufacturing index would increase to around 53-53.5, and it was in Econoday’s consensus range of 51.9-54.2% with an actual reading of 53.4%. On the non-manufacturing headline index, economists had stated the index would decline slightly to 57-56.8 from 57.3%, and it declined to 56 but stayed within Econoday’s consensus range of 55.7-58%.

Respondents to the surveys were very upbeat about business conditions except for two reservations. A respondent from Heath Care & Social Services expressed concerns that the healthcare reforms were going to drastically reduce revenue. And another from Computer & Electronic Products said business was stable, but they had concerns about China going forward. Naturally, discussing a hard or soft landing economically in China is prudent. The New Exports Orders index also showed weakness in both reports with manufacturing dropping 5.5% to 54% and non-manufacturing dropping 2% to 52.5% with both converging to low 50s.

The price index in both reports showed much needed relief downward but still maintained over 60% in both reports. The non-manufacturing price index dropped 4.5% to 63.9% and manufacturing edged lower by 0.5% to 61%. The chart below shows that the recent trend has reversed slightly.
(Click charts to expand)

The following two charts show recent upward trends from both reports for both total number of commodities rising in prices and multi-month commodities with price increases. It is not nearly as dire as during the spring of 2011, but it is something of concern if the economy starts heating up again and prices strangle economic growth. These indexes are not seasonally adjusted, so we can expect this recent trend to continue up.

Stock Picks based on ISM Manufacturing Index with Lagged Indicators
Instead of using the sub-indexes of the manufacturing report as last month, this time I regressed changes in the ISM manufacturing index with additional lagged regressors. Lags refers to delayed effects of new information. In this case let us say the ISM for January affects the market not just this month but the next and the next, etc. These results produced slightly better returns with about an additional 1/2% return over the flat-weighted S&P.

Prior research had shown that at certain lags, the independent variable was significant and could add value to the adjusted R^2. In this case there were few p-values that were significant and no pattern stood out as to which lag might provide the best additional information. Which means that the model looked better without discovering any additional information about time-delayed aspects of the reports.

Below is the result from regression with repeats of last month first and then additional choices for this month. All are rated Strong Buy by Sabrient Systems.
Continuation from the last re-balance:
American International Group, Inc. (AIG)
Cliffs Natural Resources Inc. (CLF)
Discover Financial Services (DFS)
Ford Motor Company (F)
Goodyear Tire & Rubber Company (GT)
Prudential Financial, Inc. (PRU)
Baker Hughes Incorporated (BHI)
Goodyear Tire & Rubber Company
Newfield Exploration Company (NFX)
Tesoro Corporation (TSO)
The Hartford Financial Services Group, Inc. (HIG)

Added to portfolio:
Huntington Bancshares Incorporated (HBAN)
Textron Inc. (TXT)
United States Steel Corporation (X)
Chevron Corporation (CVX)
Marathon Oil Corporation (MRO)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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MIPS Sings I Want You to Want Me, April Option Review

Scott Brown, President, Sabrient — Fri, 13 Apr 2012 19:31:06 +0000

I want you to want me

I need you to need me

I’d love you to love me

I’m beggin’ you to beg me

I’ll shine up the old brown shoes

I put on a brand new shirt

I’ll get home early from work

If you say, that you love me

Cheap Trick

MIPS Technology Inc. (MIPS) was recommended for long exposure on April 28, 2011 when we spotted value in the contracts and IP at MIPS. We evaluated the options on October 21, 2011 and decided to accept ownership of the put option sold, providing us a cost basis of $6.19 in what we deemed to be a growth stock. Share price soared yesterday afternoon when Bloomberg reported that MIPS had retained Goldman Sachs to pursue a potential sale. Goldman Sachs will help MIPS “shine up the old brown shoes” and “put on a brand new shirt” to find a buyer who will “say, that you love me.” Craig-Hallum analyst believes MIPS has a valuable intellectual property portfolio and the value of the shares is between $10-14. If that is correct, “I’ll get home early from work.” The only thing for us to do is wait and see right now. We can use covered calls on any significant spikes to protect gains while the process plays out.

Ocwen Financial Coporation (OCN) was recommended on January 29, 2012 at $13.66 with an Apr $15 call sold for $0.45. OCN is trading at $14.91 a week ahead of option expiration which is very good for us. All of the reasons we wanted exposure to OCN are still in place (see Jan 29 article), and we have a 9.22% gain plus the $0.45 call option and the ability to roll to the July $15 call (OCN120721C00015000) for approximately $0.90. Watch OCN closely next week as any move over $15 will require buy-to-close on the Apr $15 call prior to rolling, but if OCN remains at or under $15, the option will simply expire.

Rio Tinto PLC (RIO) replaced Rockwood Holdings in our recommendation on February 14, 2012 at $58.62 using the buy/write strategy with Apr $62.50 call/put for $6.85 in premium. I still like RIO for long exposure and as well as for the buy/write strategy. In the next week, we will need to roll the position to July $57.50 for approximately $8.80 (RIO120712c00057500 and RIO120712P00057500) in premium depending on which day you roll. The Apr $62.50 call will expire, and we will need to buy to cover the Apr $62.50 put for approximately $7.50 which will eliminate the premium sold for April but allow us to roll forward to July.

Those are the only 2 option positions to deal with in April while we wait to see who and how much Goldman Sachs can “beg (the buyer) to beg me (MIPS).”

Recommendations:

Buy to cover (if necessary) OCN Apr $15 call

Sell to open OCN July $15 call at the market

Buy to cover RIO Apr $62.50 put at the market during the next week

Sell to open RIO July $57.50 call at the market during the next week

Sell to open RIO July $57.50 put at the market during the next week

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Billionaires’ Stock Picks Are Beating the Market Right Now

Walter Gault, Communications Editor, Sabrient — Thu, 12 Apr 2012 19:59:35 +0000

By Meena Krishnamsetty (Insider Monkey Editor)

George Soros

If you’ve been reading articles about hedge fund performance over the past three years, you’re probably thinking index funds are better options for investors. During the last quarter, an average hedge fund underperformed S&P 500 index ETFs by around 8 percentage points. This is a bit misleading though. Actually, equity hedge funds hedge around 50% of their exposure. It isn’t really appropriate to compare hedge fund returns to broad market indices that are 100% long at all times. Hedge funds have been able to outperform the market significantly over the past 5 years. Unfortunately, hedge fund managers took around 47% of their total returns as fees (read the details here). Despite the huge hedge fund fees, investors were still able to outperform the market by 2.5 percentage points per year.

We like hedge funds. We believe hedge fund managers are talented and that they deserve billions of dollars in fees. However, we don’t think it’s a smart move to directly hand over your hard earned dollars to hedge fund managers. This will only help them to become billionaires before you can even think about retirement. A better alternative is to imitate billionaire fund managers’ top stock picks. Insider Monkey constructed the Billionaire Hedge Fund Index last month and reported that this index was beating the market by 4.4 percentage points through the middle of March. Billionaire Hedge Fund Index continued its spectacular performance over the past three weeks. As of April 9^th the index is up 17% vs. 10.6% for the S&P 500 ETF. Billionaire fund managers’ top stock picks beat the market by 6.4 percentage points since the beginning of this year. Here are the top 5 stock picks:

1. Apple (AAPL) is the most popular stock among billionaire fund managers. Almost half of them had a large position in Apple at the end of December. Apple is also the most popular stock among other hedge fund managers (see the 10 most popular stocks). The stock gained 57% this year as of Apr 9th. Apple has been an obvious value play for a very long time. At the beginning of last year the market valued the stock as if it was a low growth utility stock. By the end of the summer, low growth utility stocks had even higher multiples than technology stocks like Apple and Microsoft (MSFT). Investing in Apple was really a no brainer. It is still very attractively priced. Billionaires Ken Griffin, David Einhorn, and Stephen Mandel are extremely bullish about the stock.

2. Google (GOOG) is the second most popular stock among billionaire hedge fund managers. The stock lost 2.3% as of Apr 9th. We are optimistic about Google as well. The stock’s 2013 forward PE ratio is less than 13. It is slightly more expensive than Apple but the stock is the undisputed leader of the search business. It is expected to increase its earnings by nearly 20% per year over the next few years. We expect that Google will outperform the market over the next five years. David E. Shaw, Chase Coleman, and Ken Fisher have large positions in Google.

3. El Paso Corp (EP) is the third most popular stock among billionaire hedge fund managers. Carl Icahn hit the jackpot by investing more than a $1 billion before its merger with Kinder Morgan was announced. He had $1.9 billion in the stock at the end of December. This is a merger arbitrage play that returned 13.9% since the beginning of this year.

4. News Corp (NWSA) is the fourth popular stock among billionaire hedge fund managers. This is a conservative long-term play. The stock was a real bargain last summer. Billionaire fund managers were greedy when others were fearful. News Corp underperformed the market this year, returning 7.2% through April 9^th. Steven Cohen and John Paulson are among News Corp investors (see John Paulson’s stock picks).

5. Medco Health Solutions (MHS) is the fifth most popular stock. This is also a merger arbitrage play. The stock returned more than 25% this year until its merger with Express Scripts (ESRX) closed in early April.

As you can see hedge funds’ top 5 stock picks performed even better than the rest of their stock picks. These five stocks had an average return of more than 20%. Our billionaire hedge fund managers became billionaires because of their stock picks. Their recent performance shows that they still have their magic touch.

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Sector Detector: Investors get their overdue pullback

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 12 Apr 2012 07:04:07 +0000

You knew a bigger pullback would happen eventually. It was only a matter of when it would come, what would be the catalyst, and how far it would fall. In fact, investors have been hoping for a pullback to serve as an entry point to put more cash to work.

As I have been noting, the recent underperformance of quality-oriented quantitative models has shown all the signs of a “junk rally” phase that generally precedes a significant pullback. But it should remain contained. Optimism for U.S. stocks continues to improve as bears struggle to get any downside traction…and of course the liquidity spigot is still open.

Sure, the domestic economic data has been mixed and often disappointing, and yes, Spain appears to be struggling worse than hoped as the European debt contagion continues into the unknown. But it all seems to have merely provided an excuse for the overdue technical pullback. Wednesday’s bounce after Tuesday’s elevated-volume selloff is certainly promising. Alcoa’s (AA) positive earnings report helped bolster conviction.

On Tuesday, the major indexes were back below round-number resistance-turned-support levels at 13,000 on the Dow, 3000 on the Nasdaq, and 1400 on the S&P 500, but the Nasdaq recaptured 3000 on Wednesday, and the S&P 500 bounced back near prior resistance-turned-support at 1370. Looking at the SPY chart, it closed Wednesday at 137.00, which is below its near-term uptrend line (since late December) and very close to its longer-term uptrend line.

SPY is now trying to claw its way back above the 50-day simple moving average. A failure here might take it down to test its 100-day. However, RSI and Slow Stochastic have worked off overbought conditions, while MACD has made good progress in doing so. So, this is probably a spot where buyers will test bullish conviction by putting some cash back to work.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 20.02—essentially right at the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 38 bps, which is right around the 40 level that it has settled at.

I still believe that unless the bottom falls out on high volume (likely due to a major external event), taking out important support levels, “buy the dip” will remain the working mantra.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. As we head into earnings season, Technology (IYW) remains at the top of the Outlook rankings with an 80, but Financial (IYF) has pulled into a tie. IYW is particularly strong in its return ratios as margins remain high in tech products, but it is strong pretty much across the board on all relevant factors. IYF continues to gain strong support among analysts, along with Consumer Services (IYC), and its projected P/E is still relatively low.

2. Energy (IYE) and Materials (IYM) continue to be beaten down by the analysts and reflect by far the lowest projected P/Es.

3. Telecom (IYZ) remains at the bottom of the rankings with a 2. IYZ is saddled with the worst return ratios and the highest projected P/E. It is again joined in the bottom two by Utilities (IDU) with a score of 21. IDU has low long-term growth projections and a relatively high projected P/E.

4. Looking at the Bull scores, Financial (IYF) has been the clear leader on strong market days, scoring 56. Utilities (IDU) is by far the weakest on strong days, scoring 37.

5. As for the Bear scores, IDU is the investor favorite “safe haven” on weak market days, scoring 67, followed by IYK at 64. Notably, IYF continues to strengthen on this metric. IYM shows the lowest Bear score of 40. This means that Basic Materials stocks tend to sell off the most when the market is pulling back.

6. Overall, IYF now shows by far the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 190. IYW is close behind at 186. IYZ is by far the worst at 103. IYF also shows the best combination of Bull/Bear with a total score of 110. IYE and IYM share the worst combination with a 94.

Top ranked stocks within Technology and Financial sectors include Apple (AAPL), TIBCO Software (TIBX), Discover Financial (DFS), and Regions Financial (RF).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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What the Market Wants: Concerned Outlook

David Brown, Chief Market Strategist, Sabrient — Mon, 09 Apr 2012 23:26:02 +0000

Last Monday was a banner day for most indices with S&P 500 hitting at new 46-month high of 1422. Alas, a week later, today, it closed at 1382, down nearly -3%. The NASDAQ and DJIA exhibited similar behavior.

Frankly, it wasn’t a great week for economic data. So, should we worry? Worry, yes. Panic no. After last Monday’s strong ISM manufacturing report, we got tepid reports from the FOMC minutes, factory orders, ISM services, ADP private payrolls and initial jobless claims. None were terrible, but most were a tad below expectations.

On Friday, the Unemployment Report was a bit worse than the earlier reports with only half as many new jobs as expected (but still new jobs). To be more precise, new jobs were down about 120K from last month’s 233K new jobs and well below the expected 215K jobs. Last month’s new jobs were, however, revised upward, and unemployment rate ticked down to 8.2%.

Doesn’t sound that bad you say? True, but then a look around the globe put things in perspective. Spain’s sovereign debt rose more than expected along with other European sovereign debt that ticked up in general; geopolitical concerns rose with a lack of progress in Syria; more sabre rattling in Iran; unrest in Afghanistan and Pakistan; missile launch preparations in North Korea.

So, we head into the beginnings of earnings season tomorrow with the traditional AA report tomorrow evening. Google, JPM, WFC, and others will announce later in the week.

Until we breakdown more than 5%, or even 10%, from the recent high, which has happened several times since the market rally that began on October, I would rather stay the course of buying undervalued equities along with hedging the European ETFs, VGK, IEV or EWP, as recommended by our European analyst, Daniel Sckolnik, in last week and this week’s edition of ETF Periscope. Of course, I would suggest shorting any of those ETFs; however, choose the latter if you feel Spain is the chief risk.

Here are the market stats.

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder and threw in a couple more I thought looked intriguing:

Bofl Holding, Inc. (BOFI)–Financials
Ford Motor Co. (F)—Cyclical Consumer
Western Refining, Inc. (WNR)—Energy
Freeport-McMoRan Copper and Gold, Inc. (FCX)–Basic Materials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

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Tightening the Screws

ilene, Guest Blogger, Phil's Stock World — Mon, 09 Apr 2012 22:21:28 +0000

Tightening the Screws

Excerpts from Stock World Weekly: (Click here for a free trial)

The major indexes closed lower this week. We had been anticipating a rest in the “fake” rally, and wrote in last week’s newsletter, Under Pressure, “We’re feeling cashy and cautious again. Looking over the last two and a half weeks, the Dow has done nothing, the Russell has done nothing, the S&P has only gone up a little. The Nasdaq is up a lot – but we know that is largely due to one company, Apple Inc.!

Phil’s short term trade ideas have been mostly bearish. (We included a section on Phil’s put buying adventure in last week’s newsletter.) We’ve been expecting a correction and wonder if this is the beginning of a significant move down.

Discussing his view of the Treasury and stock markets going into next week, Lee Adler wrote to his subscribers,

“The markets face another week on relatively easy street in terms of Treasury supply.

“Even though the Treasury is auctioning a big slug of longer term paper, it is paying down bills. Thursday will see a cash paydown to the market, and the big note and bond settlement a week from Monday will see only $23 billion in new paper, which is about half of the usual mid month supply hit. The government has benefited from a surge in tax receipts toward the end of March and in early April. If that continues through April 15, then overall, April will be a light month supply wise.

“The market only had about 40 minutes to react to the expected weak jobs report in the stock index futures. The reaction wasn’t what I expected. I had thought that a bad jobs report would be like ringing the bell for Pavlov’s dogs as traders salivate in anticipation of the next treat [more quantitative easing] from their handler, Ben. The guys trading the futures didn’t agree with me, and they dumped.

“Holding down yields during note and bond auction week is Job One for the government and its co-cartel members the Primary Dealers [firms which buys government securities directly from a government, with the intention of reselling them to others], who still hold record long positions in their longer term Treasury portfolios (chart above).

“So I think the Primary Dealers will be happy to have more bad news to keep the cash flowing into the government bond market. With no big economic releases coming this week, the best way to do that is to shake the stock market tree.

“The public is still buying bonds like mad and the markets are getting renewed help from the foreign central banks and the commercial banks in the last 2 weeks. That could underpin a return to a bullish tone for stocks once the big Treasury auctions are out of the way on Thursday. All in all, the pattern looks weak for stocks and strong for bonds early in the week, with Thursday afternoon shaping up as an opportune time for reversal.” (Explore Wall Street Examiner’s Professional Edition – try it risk free for 30 days!)

Ryan Vlastelica shares our worries that the market has been running up too far too fast. He wrote, “Since October, estimates for first-quarter earnings growth have tumbled while the S&P 500 has surged. With the earnings season starting next week, the outlook is not as sunny as in previous quarters.

“Investors will assess whether slower growth is priced into the U.S.stock market, or if the S&P 500’s retreat from Monday’s four-year high is the start of a larger decline – if results disappoint.

“After the S&P 500’s rise of about 30 percent since October, there is concern that buying interest is not strong enough to drive further gains, particularly after soft March U.S. employment figures were released on Friday… (chart by Yahoo)

“Friday’s nonfarm payrolls (NFP) report was a disappointment, with just 120,000 jobs added in March, short of expectations for a gain of 203,000 jobs. Stock futures fell 1 percent in a shortened session, with the cash market closed entirely.” (Wall Street Week Ahead: Will earnings spark further declines?)

The weakness in NFP may, rather than sending the market down, revive hopes for another QE, thereby raising share prices. This market is singing, “what’s good is bad, what’s bad is good, you find out when you reach the top, you’re on the bottom.” (Bob Dylan) We will see.

Tim of The Psy-Fi Blog explained why he believes this is a dangerous market. It has something to do with the scientific method (you have to read the whole article to discover what):

“I think there’s danger for anyone executing anything other than the suggested default option of a low cost, globally diversified, occasionally rebalanced portfolio. Active private investors are engaged in an arm’s race with the securities industry and most of the big guns are facing the wrong way. The problem is that darned scientific method, which is why there’s also never been a more dangerous time to invest…

“The idea that we’re in an arms race against a better equipped, better funded and far less moral enemy isn’t one that most private investors take on, but they should. Despite our manifest deficiencies we aren’t without our own weapons – the behavioral weaknesses of the financial industry itself. We can fight a successful guerrilla war by refusing to engage in a pitched battle on their terms: trade rarely, go where they don’t go and never, ever believe you have to react in seconds or even minutes and hours. When High Frequency Trading algorithms can execute faster than you can blink you’re wasting your time, your money and throwing away your intellectual advantage: faster is not better.” (Why There’s Never Been A More Dangerous Time To Invest)

From the PSW Strategies Section

Phil and PSW members post numerous trade ideas during the day in the chat section. Selling (options), doubling down, scaling in, rolling forward… These are a few of the methods that are commonly mentioned.

The following is a detailed example of a trade idea by Phil. This strategy can be applied to buying any stock that you want to own as a long-term holding. (Note: Microsoft is trading lower now, at 31.38 on 4-9.):

“If you REALLY like a stock and REALLY want to own it at the net price – then why not sell a put on that stock? Let’s say I like Microsoft (MSFT). I could buy 100 shares for $32.29 and just cover it by selling a Jan 2014 $30 call at $4.90, for net entry of $27.39. I make $2.61 if the shares get called away. Very dull.

“I could also just sell the Jan 2014 $27 put for $2.50. Then I make (keep) the $2.50 if MSFT is over $27 at expiration – better but not thrilling. My net entry is $24.50, if the shares get put to me. That’s the difference between the price of the stock if it gets put to me, $27, and the money I collected from selling the put, $2.50, i.e., net $24.50.

“I could also buy the Jan 2013 $25/30 bull call spread (bcs) for $4. If I sell a Jan 2014 put against this bcs, I would collect $2.50, bringing my cost go down to a net $1.50 in cash ($4 for the bcs minus the $2.50 collected from selling the put).

My upside is $3.50 if MSFT holds $30 to Jan 2013 AND holds $27 to Jan 2014…

“Bull call spreads are NOT good for cashing out early in general as you get locked into the trade if you don’t have good margin (and good timing to use it with). You are far LESS likely to make quick money on a straight bull call spread, but it depends on what underlying you select. Mostly, a bull call spread is about burning premium – you sell more than you buy and it helps to have the stock move in your favor, of course.

“In the MSFT example above, the net delta on the bull call spread is just $0.22 so a $5 move up in MSFT (15%) is barely going to make you $1. On the bright side, a $5 move against you will only cost you $1, and that means you have plenty of time to react before the net drops 50% and makes it too difficult to roll, which is why we like these – they need less hedging…”

Discussing the markets, Phil wrote, “If you UNDERSTAND why something is happening, rather than panicking with the herd – you can calmly jump in and take advantage of opportunities when they present themselves…

“Who wants a market that goes up and up and up – where’s the sport? Even the Nasdaq finally blew its 15-week winning streak and that helped us decide to stay bearish going into yesterday’s [Thursday’s] close. I simply don’t see anything in particular to be bullish about at the moment.”

For more on our strategies for buying stocks at a discount, go to Strategies for Buying Stocks.

(Click here for a free trial to Stock World Weekly)

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J2 Communications: Have a Nice Day

Scott Brown, President, Sabrient — Mon, 09 Apr 2012 20:34:52 +0000

Take a look around you, look nothing’s what it seems,

We’re living in a broken home of hopes and dreams,

Let me be the first to shake a helping hand.

Everybody, pray enough to take a stand,

I knocked on every door, on every dead end street,

Looking for forgiveness,

What’s left to believe?

Oh, if there’s one thing I hang on to,

It gets me through the night.

I ain’t gonna do what I don’t want to,

I’m going to live my life.

Shining like a diamond, rolling with the dice,

Standing on the ledge, show the wind how to fly.

When the world gets in my face,

I say, have a nice day.

Bon Jovi

A quick glance at the stock chart for J2 Communications, Inc. (JCOM) shines a light on what “standing on the ledge” must feel like or at least felt like at the end of March.

Timing is everything in the stock market, and the recommendation to enter a short position on March 19, 2012 at $30.10 allows us to see the same chart as “shining like a diamond.” The 11.43% profit in less than a month gives me enough conviction to tell this position to “have a nice day” and buy to close. As we continue to “take a look around” and realize “nothing’s what it seems,” I have a feeling we will revisit this position again in the future.

Speaking of “living in a home of broken hopes and dreams,” the jobs report on Good Friday was less than inspiring. This market continues to provide constant reminders as to why remaining hedged and utilizing options to earn income while staying exposed to valuation stocks is a good idea.

Ben Bernanke’s speech tonight is likely more important than the start of earning’s season to the short-term mood of the market. There will be plenty of talk about “buying on the dip,” and I suspect an accommodating monetary policy in an election year. My strategy remains the same as “I ain’t gonna do what I don’t want to,” and I believe we should continue our strategy of hedging by “knocking on every door, on every dead end street” to find bargains to buy, shorting when we believe the company is on the ledge, using options to lower our entry cost, and in the end, telling the market to “have a nice day.”

Recommendation:

Buy to Close, JCOM, at the market

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ETF Periscope: Certainty Is Certainly Lacking In the Market

Daniel Sckolnik, ETF Periscope — Mon, 09 Apr 2012 15:14:57 +0000

“Almost every wise saying has an opposite one, no less wise, to balance it.” — George Santayana

Last week, Wall Street felt like a slightly different market than it has felt like for much of this Bullish year. Whereas investors have mostly been shrugging off hints of bad news, generally viewing dips in the market as buying opportunities, there may be enough of a shift in sentiment that a more Bearish pattern, at least in the short term, may become predominant.

Friday’s unexpectedly weak job numbers would likely have impacted Wall Street with a shove to the downside had it not been a market holiday here in the U.S. The week had already been indicating a lack of buyers in general, and the sour domestic data in the employment numbers, which has been one of the strong sections of the foundation for the brilliant first quarter, likely would have sent even more investors scurrying for the exit, cutting losses and taking profits off the table.

However, that scenario never had a chance to play out, so we shall see if the next round of earnings reports will suffice to right the ship and help it stay the course.

The reading of the Fed’s Beige Book, due up this week, will no doubt be a little more scrutinized than usual, if that is even possible, due to all the perceived revelation that Bernanke won’t be waving around the QE3 pom-pom anytime soon.

In the event that the next round of earnings reports fail to motivate traders and investors alike, it is possible that all eyes will turn once more to the EU sovereign debt crisis and the realization that a good chunk of Europe is now either in, or heading towards, recession.

With red flags such as record highs in unemployment in the Eurozone countries catching more and more attention, a trend reversal may come into effect unless there are concrete indications that the Bulls should stay the course they found themselves on for the first three months of 2012.

What The Periscope Sees

Last week, the Periscope offered up a trio of euro-centric ETFs to play to the short side, for those who just happened to be of the mind that there was more on the way in terms of an increasingly deteriorating situation in the Eurozone. Certainly, since last week, little has occurred that would have resulted in a shift from a Bearish view of the Continent to a more Bullish one.

Therefore, we are offering up once again three ETFs that can be shorted to support that hypothesis. If options are your preferred vehicle, you can purchase some Puts to express a similar POV.

The three ETFs included last week, and re-presented for your edification and insight, are VGK (MSCI European ETF), IEV (iShares S&P 500 Europe 350 Index Fund), and EWP (iShares MSCI Spain Index Fund).

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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Sector Detector: Investors hoping for a bigger pullback

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 05 Apr 2012 06:09:59 +0000

Bulls have struggled to keep the ball rolling during the past couple of days of uninspiring news. After Monday’s ISM data showed strength in the manufacturing sector, the S&P 500 hit another 52-week high, before selling set in for Tuesday-Wednesday. It seems the hawkish tone of the FOMC meeting minutes coupled with tepid demand for the latest Spanish debt offering was just a bit more than bulls could overcome. Like we saw with Greece’s debt situation, global investors have serious doubts that Spain has the fortitude to sustain the necessary fiscal reform.

Nevertheless, round-number resistance-turned-support levels at 13,000 on the Dow, 3000 on the Nasdaq, and 1400 on the S&P 500 have held up through Wednesday, although the S&P 500 closed slightly below support. The S&P 500 index has fallen eight of the past twelve sessions, and the Nasdaq posted its worst daily percentage decline for 2012. Nine of the 10 sector iShares are lower for the first three days of the week, with Materials (IYM) and Energy (IYE) the weakest and defensive sector Utilities (IDU) the only one staying positive.

The “junk rally” phase that the market has reached generally precedes a significant pullback to remind investors about the importance of quality when choosing a good stock investment. In fact, I think bulls are eager for a bigger pullback as a much needed retest of key support levels from which to build a foundation…and to put more cash to work at lower prices.

The first quarter of 2012 closed with stocks achieving their strongest quarterly gains since 1998. The S&P 500 was up 12%. Utilities, which was the best performing sector during 2011, was the worst performer for 1Q2012. Financials and Technology were the quarter’s best performers. Tech was led by Apple (AAPL), of course, which was up an amazing 48%–accounting for more than a third of the S&P 500’s gain for the quarter.

Looking at the SPY chart, it closed Wednesday at 139.86, which is just below the 140 resistance-turned-support level. It is testing support at the near-term uptrend line (since late December). Below that, there is support from the longer-term uptrend line around 137. RSI, MACD, and Slow Stochastic all have a ways to go to work off overbought conditions and cycle back down to oversold.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 16.44, which is still well below the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 40 bps, where it has held flat since mid-February. This appears to be the level or credit risk at which investors are comfortable.

With yields so low, Treasuries remain overvalued. For yields to rise prices have to fall, which means selling—and the likely transfer of capital into equities and other risk assets. So, if Europe can hold things together, and if the impending earnings season is reasonably encouraging, there’s no reason that the growing legions of bulls can’t take the S&P 500 to 1500 within the next several months. Unless the bottom falls out on high volume (likely due to an major external event), taking out important support levels, “buy the dip” will remain the working mantra.

After all, the world depends on it. Despite what you hear about the rapid emergence of China, the U.S. remains the engine of global economic growth, especially given the struggles in Europe and Asian. The FOMC and the ECB both recognize this, which will keep them pumping the liquidity spigot and making riskier assets relatively attractive.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. There is not a lot of change in the rankings as we head into earnings season next week. Technology (IYW) remains at the top of the Outlook rankings with an 83. IYW is particularly strong in its return ratios as margins remain high in tech products, but it is strong pretty much across the board on all relevant factors. Only its projected P/E is mediocre, as prices continue to soar within the sector.

2. Financial (IYF) widened its lead over Healthcare (IYH) for second place with a score of 78. IYW and IYF are now well above the pack. They also are getting the most support from Wall Street analysts, along with Industrial (IYJ).

3. Energy (IYE) and Materials (IYM) continue to be beaten down and now reflect the lowest projected P/Es. IYM in particular continues to get hit with net earnings downgrades from Wall Street.

4. Telecom (IYZ) remains at the bottom of the rankings with a 4. IYZ remains saddled with the worst return ratios and the highest projected P/E. It is again joined in the bottom two by Utilities (IDU) with a score of 21. IDU has poor long-term growth projections and relatively high projected P/E.

5. Looking at the Bull scores, Financial (IYF) has been the clear leader on strong market days, scoring 56. With its consistent recent performance, Technology (IYW) has risen to 50. Utilities (IDU) is by far the weakest on strong days, scoring 34.

6. As for the Bear scores, IDU is the investor favorite “safe haven” on weak market days, scoring 59, followed by IYK at 57. IYM shows by far the lowest Bear score of 33. This means that Basic Materials stocks tend to sell off the most when the market is pulling back.

7. Overall, IYW still shows by far the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 185. But IYF is close behind at 183. IYZ is by far the worst at 96. IYF now shows the best combination of Bull/Bear with a total score of 105. IYE and IYM share the worst combination with a dismal 84.

Top ranked stocks within Technology and Financial sectors include F5 Networks (FFIV), Gartner Inc. (IT), BB&T Corp (BBT), and HomeStreet Inc. (HMST).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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What the Market Wants: Strong Start for the Quarter

Walter Gault, Communications Editor, Sabrient — Mon, 02 Apr 2012 23:32:39 +0000

Editor’s note: Walt Gault is the guest author this week. David Brown will be back next week.

The major averages ended the day with strong gains for the first trading session of the second quarter. Equities opened with modest losses, but quickly reversed to gains following the ISM Index reading of 53.4, beating forecasts, combined with China’s Purchasing Manager’s Index hitting an 11-month high, and ended the session at a four-year high. The Nasdaq’s +0.9% surge was pacing the advance while the S&P 500 climbed +0.7%, and the Dow lagged with a gain of +0.4%. The S&P 500 and the Dow both closed at multi-year highs.

All Small-cap styles led today with Value up +1.31%, Growth up +1.09%, and the entire cap up +1.22%. Large-cap Growth followed, up +0.86%, while Mid-cap Value came in “last,” up +0.46%. The market stats are delayed today, so please look on our website tomorrow for an update.

China’s PMI report takes away some of the concern investors had for a hard landing. Another concern addressed today in the ISM report was that the strong first quarter was caused by the relatively mild winter. Today’s action could bode well for investors as April has been a historically strong month for the S&P 500.

To the contrary, there are concerning developments that might eventually crash the party. Construction spending was down -1.1% from the last report and 1.8% below the consensus estimate. Of further concern, unemployment in Europe continued to climb to 10.8% from 10.7%, the highest level since June, 1997. The purchasing managers’ index for the European manufacturing sector fell to 47.7 in March from 49.0 in February, tilting activity into its steepest decline in the last 3 months.

Despite the excitingly strong start to 2012, uncertainty lies ahead. The best remedy is to buy GARP (Growth at a Reasonable Price) and consider using the VIX Short-Term Futures (VXX) as a hedge.

4 Stock Ideas for this Market

This week, I used the GARP preset search in MyStockFinder. Here are four stock ideas for your consideration:

General Motors, Co. (GM)–Cyclical Consumer
Deckers Outdoor Corp. (DECK)–Cyclical Consumer
CVR Energy Inc. (CVI)—Energy
United Therapeutics Corp. (UTHR)—Healthcare

Until next week,

Walt Gault
Communications Editor & Stock Analyst
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

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ETF Periscope: The Pain in Spain is Unlikely to Stay on the Plain

Daniel Sckolnik, ETF Periscope — Mon, 02 Apr 2012 15:22:10 +0000

“There are only two mistakes one can make along the road to truth; not going all the way, and not starting.” – Buddha

You may forgive Wall Street if it is acting a bit giddy as of late. It has just come off one of its best first quarters in over ten years, and after the wild ride of 2011, who can blame it for a round or two of light-headed celebration?

The numbers are, on the face of it, admittedly pretty impressive.

The Dow Jones Industrial Average (DJIA) swung upwards to the tune of 8.1% for the first three months of 2012, which, at least in terms of total points gained for a Q1 period, placed it at the very top of the heap. Not too shabby, when you consider that the Dow’s history encompasses a timeline of roughly 128 years.

As for the S&P 500 Index (SPX), it ended Q1 up 12% through the end of March, a first-quarter performance not seen by the benchmark index since the heady days of the dot.com era, a good 14 years back. The most stunning performance of the quarter by a far margin, however, was the Nasdaq Composite Index (COMP), which gained 18% over the same time period. Apple’s otherworldly 40% gain over the course of the first three months of the year certainly served as the fuel that blasted the Nasdaq into the stratosphere, though the tech heavy index certainly had a lot of room to move up, having been something of a laggard during the current Bull Run that stretches back to ’09.

As for the Dow, 13,000 seems to be the developing as the latest testing ground for the Blue-Chip index’s next potential leg up, and that psychologically important horizon may e eventually serve as a textbook example, in terms of technical analysis, of a level that segues from critical resistance into crucial support.

Which side of the line the Dow ends up spending the majority of its time on in the immediate future will depend on the same two factors that have served as the primary influence on the equity markets for the last year: the domestic economy and the Eurozone.

If it’s true that a reasonably accurate take on the U.S. economy is reflected in the health of its corporations, then the next wave of earnings reports for Q1 2012, officially beginning with the “first pitch” tossed out by Alcoa (AA) next week, should affect the mercury in the barometer in fairly short order. If a positive trend emerges in the overall earnings arena, then the Bulls can downshift, regain traction, and resume the current year’s momentum.

A strong round of earnings reports may also be what it takes to coerce all those bystanders on the sidelines, holding cash positions and harboring doubts of the equity market, to start buying stocks and boost the relatively anemic volume that has been one of the hallmarks of Wall Street so far this year.

As for the Eurozone, anyone who has bought into the notion that the structural problems of that monetary union have been addressed with the Europe Central Bank’s own version of quantitative easing, introduced through the vehicles of LTRO 1 & 2, may be somewhat surprised when the next round of serious problems breaks out among the PIIGS (Portugal, Ireland, Italy, Spain and Greece) in 2012.

Oh, perhaps you are subscribing to the notion that all is well on the Continent? You might want to recalibrate your objectivity meter.

There should be serious doubts remaining that the deeper sovereign debt issues of the region have really been put to bed. As Exhibit A, you need not look much further than out to the Plains of Spain, where it just might be possible for one to notice that a slow moving train wreck may be well in the works.

Spain’s government had agreed just last month to the demands of the European Commission, which insisted that the country with the fifth largest economy in the European Union (EU) cut back on its 2012 deficit by a staggering 3.2% of GDP. Considering the fact that the Spanish economy is estimated to shrink by close to 2% this year, an \indicator of recession by just about any measure, and that the Mediterranean country has the highest rate of unemployment in the EU, it is hard not to figure out that additional austerity measures may
not be wildly popular with the locals.

Recent national strikes have been called in response to the belt tightening, and, with almost half of those who are 25 and under currently unemployed, it is not a stretch to anticipate some level of social mischief to manifest in response to the deteriorating economic
situation.

Needless to say, Wall Street will get understandably skittish at the site of a staggering PIIG(S).

Spain’s citizens may yet choose to vote out the current deficit-cutting leaders at first opportunity, and vote in a group of more growth-friendly politicians. Eventually, Spain may opt out of a union that, at the moment, hardly seems to be following through on the promise that was hoped for when it first opted into the EU.

As for the level of pain Spain can entertain before spreading out to the broader region? Hard to say, but you can bet that, if the song of more austerity at the cost of growth remains the same, the Dow 13,000 line will assume the role of a sturdy level of resistance.

What the Periscope Sees

If you are of the mind that the calm over the Eurozone is the one before the storm, there are a number of ETFs that you can play to the short side in anticipation of a drop in the market. These include VGK (MSCI European ETF), IEV (iShares S&P 500 Europe 350 Index Fund) and, for those who want to go for a more laser focus, EWP (iShares MSCI Spain
Index Fund).

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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Durable Goods and The Stock Market, with The Fed In The Driver’s Seat

ilene, Guest Blogger, Phil's Stock World — Thu, 29 Mar 2012 15:08:07 +0000

Intro by Ilene

After reading Lee’s article, I asked him, “Why is it the Fed’s job to be propping up the stock market? Doesn’t it make the whole market a Fed-controlled game, rather than what it started as – a mechanism for companies to raise money and people to invest in public companies?”

Lee answered: “Bernanke has made no bones about it. He sees the stock market as a legitimate instrument of policy manipulation. It’s his biggest tool, much bigger than the ones between his ears and his legs. The Fed works for the banks, and the capital markets exist as a means for ‘capitalists’ to extract wealth from the public. Stock markets weren’t started for the purpose of enriching the public, that’s for sure… The Fed has two clients, the US Treasury, and the banking system. It operates to make sure that they stay in business.”

Lee also noted that the history of the Fed is replete with a variety of programs where it tried to manipulate something. “The stock market manipulation is relatively new as an overt policy tool, but the Fed can’t manipulate indefinitely. Eventually the unintended consequences will rise up and bite it in the ass.”

Another good question from “the grateful unemployed” in the comments section of Zero Hedge was “So why did the Fed precipitate the 2008 crash? Any thoughts?”

Lee: “It was just another one of their serial blunders. It’s just that some of their mistakes look good on the surface for a while until the unintended consequences overwhelm the intended ones. That one went bad immediately. I was shocked at the time that they would sterilize the alphabet soup programs that started with the TAF in 2007, by pulling the funds from the SOMA, thus crippling the Primary Dealers. I warned repeatedly that it would precipitate a crash, especially as the Treasury began selling over $100 billion a week in new debt to fund the TARP in Q3 2008. Bernanke fucked up, plain and simple. They started to realize the mistake in November by starting direct purchases of limited amounts of GSE paper, but didn’t go full bore until they started massive Treasury purchases in March 2009. That turned the market.”

Durable Goods and The Stock Market, with The Fed In The Driver’s Seat

Courtesy of Lee Adler of the Wall Street Examiner

Durable goods orders rose 8.7% In February versus January on a nominal, not seasonally adjusted basis. The mainstream media reported only the 2.2% seasonally massaged increase, which missed the consensus expectation of 2.9%. The actual, unadjusted increase was the best February gain since February 2004, so the actual data could hardly be read as disappointing. Last February, the month to month increase was only 0.90%, and the gain in February 2009 was only 2.8%. The average February gain over the past 10 years was 5.2%. Any way you slice it, this was a very strong increase. Once again, the use of seasonal adjustments obscures the truth and sends the market racing to the wrong conclusion in the knee jerk reaction.

In nominal terms, durable goods orders are now up 17.8% year over year. The rate of increase has actually been increasing lately.

In real, inflation adjusted terms the increase was “only” 14.4%. That’s still a huge jump. The problem is in the big picture. While durable goods orders have had a strong cyclical increase, they have only recovered 60% of the loss incurred during the recession. The idea of US manufacturing making a comeback is a myth. This myth may have arisen because the rest of the world is doing worse under austerity than the US is doing under ongoing stimulus spending and Fed propping. No doubt if the Federal government ever decides to actually reduce the deficit, the meager growth the US economy has shown would stop dead and reverse. Furthermore, if US companies really are moving production back home and adding to capacity in the process, based on the long term trend of orders, they are headed for another bust. It’s only a question of when.

Real Durable Goods vs. Stock Prices Chart – Click to enlarge

The chart shows just how sick the secular trend of the US manufacturing economy is. However, that does not matter to the stock market, which is perfectly capable of increasing its margin away from the trend of manufacturing in the US due to the financialization of the economy. Durable goods orders are at best a concurrent indicator of stock market trends. Orders lagged the downturn in stocks 2007-08.

In fact, this measure of manufacturing did not collapse until after the Federal Government and the Fed panicked in 2008 and pulled $700 billion out of the economy in raising TARP and funding it through debt sales, which the Fed then funded through a variety of propping programs that were themselves funded by the Fed pulling cash out of Primary Dealer trading accounts. The Fed’s withdrawals of dealer funding precipitated the stock market collapse, and the economy followed.

As I have shown throughout the 10years I have been directly tracking this, the Fed has near absolute control over both the US stock market and the economy based on how much cash it pumps into Primary Dealer trading accounts. This indicator is a proprietary measure of the amount of money the Fed pumps through Primary Dealer accounts. The data is all available from the Fed in various places. I just accumulate it and publish it weekly in the Wall Street Examiner Professional Edition Fed Report.

The Fed and the Stock Market- Click to enlarge

When the Fed buys securities from the dealers it pumps cash into their trading accounts, the market rises and the economy tags along. When the Fed drained money from dealer accounts, especially in the face of the Treasury selling $700 billion in new debt over the same time window, the economy collapsed. I’m well aware that correlation doesn’t imply causation. In this case, the cause and effect are easily observed. The effects of the Fed’s actions are completely predictable now, just as they were in 2008, when I warned that what the Fed was doing would precipitate a crash. While the mainstream gives Bernanke credit for averting an even worse fate, the facts clearly show that his and Henry Paulson’s panicked actions (not to mention then NY Fed President Tim Geithner) triggered a far more precipitous break than might otherwise have occurred.

Here’s an all in one chart that uses a slightly different measure of Fed actions that doesn’t capture all of the impacts of the nuances of various Fed policy measures, but it’s clear enough to give you the idea.

The Fed, Stock Market and Durable Goods Chart- Click to enlarge

Had the Fed not pulled cash from the SOMA in 2008, it is highly likely that the market would not have crashed and the economy would not have collapsed. The glide path would have been much smoother. Once the Fed realized its error and resumed direct pumping to the Primary Dealers, the market and economy recovered to the trend level it would have been on. As long as the Fed keeps the Primary Dealers flush with cash, the market and the economy will respond in kind. Financial assets and commodities will continue to rally and the economy will follow along in a slow growth path.

At some point, however, inflation will tie the Fed’s hands. Will it be this summer, when the Fed’s MBS purchase program ends? Then what? A wide variety of inflation measures, including especially commodity prices, which the Fed pretends to ignore, will hold the key to whether the Fed can continue to artificially drive up asset prices in a way that promotes false and otherwise unsustainable economic growth.

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Sector Detector: 1999 redux?

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 29 Mar 2012 06:04:44 +0000

Despite Wednesday’s stock market weakness, selling remains contained. Round-number resistance-turned-support levels at 13,000 on the Dow, 3000 on the Nasdaq, and 1400 on the S&P 500 have held up. The S&P was the last to breakout and the first to test support. In fact, it has been testing support at 1400 almost every day since it broke out two weeks ago.

For its part, the Nasdaq 100 Index, which is tracked by PowerShares QQQ Trust (QQQ) and is dominated by Apple (AAPL), has held up the best. In fact, as AAPL continues its inexorable trek “to infinity…and beyond,” QQQ is on track for its 13th consecutive weekly gain. This is an even longer streak than the 11 straight weeks back in 1999, thus bringing up the inevitable comparisons to that heyday of “irrational exuberance.”

Many market observers who have doubted this rally since the beginning are throwing up their yellow caution flags yet again. Eventually they’ll be right, as the market can’t go up forever. But I’m not seeing any major worries reflected in either the charts or the Sabrient SectorCast quant rankings.

Among the ten U.S. sector iShares, Technology (IYW), Healthcare (IYH), and Financial (IYF) have been the strongest this week through Wednesday, and they remain the top three in the SectorCast rankings. Energy (IYE) has been the decisive laggard this week, down more than 2%, followed by Materials (IYM) and Telecom (IYZ). Bank stocks were leaders on Wednesday, and in fact the Financial sector ending up finishing positive on a negative market day.

Not surprisingly, given the market’s strength since the start of the year, the more aggressive and economically-sensitive sectors like Financial, Technology, and Consumer Services/Discretionary have shown the best year-to-date performance. Last year’s leader Utilities, the ultimate defensive sectgor, has been a laggard.

Although Europe is sinking into an inevitable recession, fears of a global recession have subsided, and Greece seems stable for the moment. Nevertheless, risks remain. Sabrient’s newest publication for investment professionals examines those risks within a scenario analysis. The MacroReport is co-published with MacroRisk Analytics (MRA), a firm that provides a scientifically tested methodology for measuring the economy’s influence on investment prices. Each month, The MacroReport focuses on a specific macroeconomic situation or global hot spot. The inaugural March report focused on the Eurozone, and you can view it here: The MacroReport.

This week, I’m showing the weekly chart of the SPY for the past 6 months. Whereas the daily chart continues to threaten to roll over to work off its overbought technical conditions, the weekly chart looks quite healthy, thank you very much. SPY closed Wednesday at 140.47. Resistance remains around 142 and near-term support at the uptrend line around 138.

At these elevated price levels, risk and reward are in better balance than they were at higher levels of investor fear. Notably, a weak dollar has been essential to the market’s strength, but now it is stuck in a tight trading range and appears to have stabilized at a strong support level. We’ll see how this development impacts stocks going forward.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 15.47, which is just about exactly where it was last two Wednesdays. It remains comfortably below the important 20 threshold. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 39 bps, where it has held flat since mid-February. This appears to be the level or credit risk at which investors are comfortable.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Technology (IYW) remains at the top of the Outlook rankings with an 82. IYW is particularly strong in its return ratios as margins remain high in tech products, but it is strong pretty much across the board on all relevant factors. On its projected P/E is mediocre, as prices continue to soar within the sector.

2. Financial (IYF) moved back ahead of Healthcare (IYH) for second place with a score of 66, but IYW, IYF, and IYH have been dominating the top three. Financial and Technology stocks are getting the most support from Wall Street analysts, along with Industrial (IYJ).
3. Energy (IYE) and Materials (IYM) continue to be beaten down and now reflect the lowest projected P/Es. IYM continues to get smacked with net earnings downgrades from the analysts.

4. Telecom (IYZ) remains at the bottom of the rankings with a 2. IYZ remains saddled with the worst return ratios and the highest projected P/E. It is again joined in the bottom two by Utilities (IDU) with a score of 20. IDU has poor long-term growth projections and relatively high projected P/E.

5. Looking at the Bull scores, Financial (IYF) has been the leader on strong market days, scoring 55. Materials (IYM), Industrial (IYJ), and IYF are the only ones scoring above 50. Utilities (IDU) is by far the weakest on strong days, scoring 32.

6. As for the Bear scores, IDU is the investor favorite “safe haven” on weak market days, scoring 59, followed by IYK, IYC, IYH, and IYW. IYM shows by far the lowest Bear score of 38. This means that Basic Materials stocks tend to sell off the most when the market is pulling back.

7. Overall, IYW still shows by far the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 186. IYZ is by far the worst at 95. IYW also shows the best combination of Bull/Bear with a total score of 104. IYE now has the worst combination at 87, as investors don’t seem to want to hold Energy stocks under any circumstances.

Top ranked stocks within Technology and Healthcare sectors include Apple (AAPL), Acorn Energy (ACFN), Zions Bancorporation (ZION), and PacWest Bancorp (PACW).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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$105,637 for Me, $80 for You!

ilene, Guest Blogger, Phil's Stock World — Tue, 27 Mar 2012 22:24:40 +0000

$105,637 for Me, $80 for You!

By Phil of Phil’s Stock World

Isn’t this economy FANTASTIC?

It sure is for those of us in the top 1% (1.4M) - people earning over $352,000 in annual income. We made $105,637 more Dollars in 2010 than we did in 2009 – thanks in large part to the Fed’s fantastic policy of printing more and more money, which lets us borrow cheaply or invest with leverage in inflating equity as the Dollar collapses.

Sure the Dollar collapsing hurts everyone – but an extra $105,637 keeps us ahead of inflation, right?

I’m still jealous of course (good Capitalists are always jealous), as the top .01% (14,000 people) – who earn an average of $23.8M, were able to add another $4.2M to their annual incomes in 2010. That’s 52,500 TIMES the average $80 increase earned by the bottom 99% (thank goodness we’re not one of THEM!).

That’s right, somehow, the riff-raff in the bottom 99% managed to grab 7% of the Nation’s total increase in income – clearly Congress needs to make immediate changes to prevent this travesty from happening again!

Steve Rattner has a different opinion, saying: “The only way to redress the income imbalance is by implementing policies that are oriented toward reversing the forces that caused it. That means letting the Bush tax cuts expire for the wealthy and adding money to some of the programs that House Republicans seek to cut. Allowing this disparity to continue is both bad economic policy and bad social policy. We owe those at the bottom a fairer shot at moving up.”

That’s Commie talk! If we allow the bottom 99% to make a fair share of the money, they would make 5% more and you know they would only SPEND it on stuff they need TO LIVE. Then our companies would have to provide more goods and services to the bottom 99% and jobs would be created and we, at the top, would have to WAIT for the money to trickle UP from the bottom as only companies that do a good job servicing the bottom 99% would increase in value.

Even worse, we may have to WORK (a four-letter word) to provide goods and services for the people who have money in order to EARN (another four-letter word) our Incomes. That’s no fun for us at all!

We like it when we get ALL the money and we create just the jobs we choose by buying really expensive cars or really expensive homes or really expensive ($8.50) burritos at CMG because you know an $8.50 burrito creates more jobs than four $2 burritos that poor people would buy at Taco Bell – it’s a Rich Person’s FACT!

My $1M, 6,000 square-foot home created 2 more jobs than the standard $250,000 2,000 square foot home and sure, you could argue that 4 could have been built instead of one for the same price and that 16 people could have been housed instead of 4 and – oops, what was my point going to be???

Of course it’s not just flesh and blood people in the top 1% that hog all the income – top 1% Corporations are also choking off the bottom 99% by sucking up all the money.

On the right, there’s a chart that illustrates how AAPL has GAINED 8% in earnings since Jan 2011 while the ENTIRE rest of the Technology sector has LOST 3% as a group.

AAPL employs 60,400 people while the rest of the sector employs (employed) millions but, to be fair to AAPL, it probably employ millions of Chinese people, so it’s all good somewhere on the planet.

The fact that the bottom 99% of the Nasdaq 100 is actually going DOWN in earnings per share doesn’t stop investors from taking the AAPLdaq to fresh highs for the century but we’re bearish on the Nasdaq because we feel that IF AAPL falters, the crash is going to be SPECTACULAR. Even if AAPL does well, what happens when the sheeple who sampeded into tech get the Q1 earnings reports and discover that AAPL is one of the only positive stories out there?

Last year, the Nasdaq rebalanced AAPL from 20% of the index down to 12% of the index but now AAPL is almost back to 20% again, as it completely shreds all competion and grabs up those consumer Dollars before they can accidentally trickle anywhere else. Even in the S&P 500, AAPL is now 3.8% of the index, well ahead of #2 XOM (3.3%) and #3 MSFT (1.9%). AAPL’s 33% gain (so far) has boosted the Nasdaq and the QQQs 16.6% and added 9.6% to the entire S&P 500.

The problem has become so acute that several major analysts are delivering clients two sets of market reports, one with Apple included and one “ex-Apple.” The chief equity strategist at UBS AG (NYSE: UBS) creates two versions of his S&P 500 outlook reports; so do analysts at Goldman Sachs Group Inc. (NYSE: GS), Barclay’s Capital, Wells Fargo & Co. (NYSE: WFC) and Morgan Stanley (NYSE: MS). For example, they point out that the S&P’s fourth quarter 6.6% rise would have been only a 2.8% gain ex-Apple (reflecting Apple’s 40% gain since Thanksgiving) and profit margin growth, which registered a 0.05% gain in the fourth quarter, would have actually been a negative 2.2% ex-Apple.

Oh well, that’s Capitalism, isn’t it?

AAPL does to bottom 99% of the Nasdaq what any top 1%’er does to the bottom 99% of the American people - they make more and more while the bottom 99% make less and less, or work harder just to stay in place.

As long as you look at the WHOLE basket – it looks like things are getting better for the group – only a closer examination shows you how disparate the incomes of the top and the bottom have become over time.

Of course things seem just fine if you are in the top 1% and they can only get ”better” if you make more money and that means – very simply – less for the bottom 99%. When do we have the ideal amount? When we have 100% and the bottom 99% has zero? We already have 25% and in 2010 we captured 56% of the income gains so our diproportionate share is, indeed, growing even more disproportionate every year.

Don’t you think we should have a stated goal for how little we want the bottom 99% to have? We’ve already put them below the 50% line that held in the great depression.

Actually, there’s a funny story there because the bottom 99%’s share of the income bottomed out in 1927 and that was 3 years BEFORE the US Economy collapsed. One might say we over-did it back then as the resulting Depression impacted the incomes of the top 1% as well but, as noted above, the top 1% have their own top 1% and, every once in a while, it’s good to purge the bottom 99% of the top 1% because those 14,000 people have never had it so good.

While the bottom 99% may complain that they only got 7% of the income gains in 2010 – the bottom 99% of the top 1% also got screwed, capturing just 1/3 of the gains for 1.4M while the top 14,000 took 66% of the pie.

Just like in 1927, the stock market is roaring as the rich get richer and trickle their increased earnings into stocks and commodities, with commodities being the most fun as rich people get to buy things they don’t need like bars of gold or tankers full of oil. They SPECULATE that the prices will go up.

Of course, when people who don’t need a commodity take large quantities of the commodity out of circulation with no intent to consume it – they create an artificial shortage that drives the price of that commodity higher – it’s BRILLIANT!

It ends very badly, but what a ride! No one wants to miss out on the rally, regardless of the consequences and the top 1% have LOTS of money to throw into the markets and, when your income jumps 20% a year - you do tend to want to toss a little more cash into the market and that’s how “hot” money flows in.

That then is followed by what Guy Lerner refers to as the “dumb money,” – four groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows extreme bullishness.

As stated by Lerner last week: “If we look at the “dumb money” indicator in figure 1, we know that as long as the indicator stays above the upper band (see green arrow on chart), prices should continue to go higher – albeit in a grinding fashion at this stage of the rally.

I had made a similar observation in Friday’s post, saying anything other than a move up into Friday’s end of quarter would make us very bearish. We had added some bullish plays in expectations of this but yesterday’s move up was so sharp that we took the opportunity to press a few bear side bets – just in case we don’t get another crack at yesterday’s highs.

If we do head higher into the week’s end, we still plan to short some more – and if the markets do hold up into April, we’ll be happy to capitulate and add more bullish trades but, for now – I’m just not seeing the internals to support these levels.

We’ve exhausted our 10 Bullish Trade Ideas from our 3/14 post and we took the 50% profit and ran after just 2 months on our “One Trade for 2012” (BAC) - although some of our trade ideas are still playable and will do very well if Bernanke comes through with April QE3 but now we’re going to look at MORE AGGRESSIVE trade ideas if our new 13,200 goal on the Dow holds up along with 1,420 on the S&P (our 2.5% line). We keep pressing our levels because - IF this is a real bull market driven by underlying inflation and Fed money printing – then we expect it to go up and up and up. Any signs of faltering should immediately turn us more cautious – you DO NOT want to be the last man to leave this Ship of Fools if it starts to sink.

So we, in the top 1%, don’t fear inflation – nor do we fear a devaluation of our currency because we get to borrow that currency cheaply and leverage it up into massive gains against relatively small moves in the market and, best of all – we get to pay the bottom 99% people the same wages we paid last year, perhaps even with less benefits, using that rapidly devaluing currency in exhange for your increasingly productive labor. No wonder Corporate Profits are at record highs (even if it is just the top 1% of Corporations)…

God bless Capitalism!

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Another Sign Bottom is Behind, House Sales Contracts Rise 14%

ilene, Guest Blogger, Phil's Stock World — Tue, 27 Mar 2012 18:50:38 +0000

Another Sign Bottom is Behind, House Sales Contracts Rise 14%

Courtesy of Guest Author Lee Adler of the Wall Street Examiner

Contracts for the sale of existing homes rose 15.1% month to month in February, according to data reported today by the real estate brokers lobbying organization. Sales were 14% above the level of February 2011, continuing the rebound in housing market sales.

To keep this in perspective the number remains down 37% from the peak February level reached in 2005 at the height of the housing bubble. In addition reported contract failure rates around 33% in February were well above the 9% reported in 2011. Buyers are still having trouble running the financing approval gauntlet, with the result being that the gain in final sales will be much smaller than the 14% year to year gain in contracts. These contracts will settle mostly in April. When the final sales numbers for April are reported in May, the gain should be in the 8-10% range year over year if the fallout rate is similar to the February rate.

At the same time, cash sales are running 33% of total sales. Demand from buyers who do not require or use financing is helping to stabilize prices and even push them higher in some markets. For example, median February closed sale prices of single family houses in Florida, the poster child for the bubble and collapse were up 7.2% year to year. Condo and townhouse prices rose 15.9%. Deny that, bottom deniers. Florida also saw huge increases in contract volume in February. You can’t credit or blame the weather for that. It’s Florida, after all. February is always nice in the state’s biggest markets.

As usual, the mainstream media continue to report only the meaningless and misleading seasonally massaged data, which showed a 0.5% decline nationally month to month. I am only interested in the actual numbers. In that regard, the actual February gain of 15% compares favorably with the 11.3% gain in February 2011 and 10% gains in 2008 and 2009. In 2010, the government was running a taxpayer hosing boondoggle that resulted in a 20% February gain, that was followed by a sales collapse when the giveaway ended in April. Except for that, the February 2012 data is the best February in 11 years and probably longer. Even during the bubble years, no February was as good. So it is hard to understand how the seasonally fudged data manages to come out as a decline. It’s worthless garbage.

A benefit of the higher rate of sales and a trend of sharply falling active for-sale inventory is that the inventory to contracts ratio has fallen to 5.4, which is the lowest February level since 2006. The reduced inventories have had an impact in causing prices to firm up over the past 12 months.

Existing Houses Inventory to Sales Ratio Chart- Click to enlarge

A large part of that was probably due to the unusually warm weather (except in Florida and other sunbelt states). This may have stolen demand from March and April. It will be interesting to see if the numbers for those months hold up. If they do, it would be more evidence that housing has bottomed. However, even if it has, we should be under no illusion that housing will ever recover to its past bubble levels in the biggest bubble markets. But it would not be surprising to see transactions rise in value at or above the inflation rate. And some markets where inventories are tighter will see new highs.

A caveat, applying mostly to sellers, is that transaction volumes will remain low by historical standards. This is a much smaller market now and will remain smaller for years to come as full time employment barely grows from low levels.

This smaller, historically depressed market will mean that mortgage portfolios will be far slower to respond to improvement. Foreclosed and delinquent mortgages will continue to weigh heavily on a financial system that refuses to write mortgage values down to appropriate levels. Fannie and Freddie will continue to hand off billions in losses to US taxpayers year in and year out for a generation.

Meanwhile, most of the much feared shadow inventory will become increasingly non marketable as it deteriorates physically, or is concentrated in areas where virtually no market exists. For most markets in the US, shadow inventory is not a threat. It is a threat primarily to the institutions that hold it, Fannie and Freddie in particular, which means that we, US taxpayers, will be footing the bill for years to come.

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ETF Periscope: Why BATS is a Black Swan Precursor and VIX a Strong Antidote

Daniel Sckolnik, ETF Periscope — Tue, 27 Mar 2012 17:14:31 +0000

“People who say they don’t care what people think are usually desperate to have people think they don’t care what people think.” –– George Carlin

Way back in the day, oh, somewhere around May of 2010, a reputed “fat finger” leaned a bit too heavily on the sell button, and traders went all bug-eyed as they watched billions of dollars in market value evaporate into the void of cyberspace in what seemed like a heartbeat.

Much hullaballoo was made over the “flash-crash” issue at the time, and unnerved investors and enraged pundits demanded that some sort of system of safeguards be installed to assure that such a harrowing event would never be replicated.

Ultimately, existing precautions were deemed adequate, not much of note was changed, and Wall Street, as is pretty much the modus operandi of the beast, moved on to the next looming crisis.

But perhaps they moved on a bit too fast.

As of late, more “real world” style worries have dominated the market conversation, predominantly in the form of the Euro zone sovereign debt crisis and the relatively slow recovery of the U.S. economy.

However, for those who pay attention to such things, something happened last week that might be seen as a harbinger of a different set of problems, problems that are a near-cousin to the flash-crash of 2010.

On Friday, like the return of a bad dream or a not-missed old flame, the dangers of the electronic market reentered the fore, when BATS, the third largest equities exchange operator on the planet, acted like a light with a loose wire and a short circuit. A serious glitch on the exchange caused a trade in APPLE to sour, ending with trading in the uber-company to be temporarily brought to a halt.

As if that wasn’t enough for BATS to have a really bad day, the fact that it occurred on the very same day that BATS Global Markets Exchange, Inc. was making its own IPO debut surely made it so. Just for emphasis, BATS dived down, albeit briefly, to the low, low price of less than a penny.

All the trades that were impacted by the glitch were subsequently cancelled, and BATS ending up, pulling its IPO offering off the market, at least for the time being.

One should likely not be surprised by the fact that such a thing occurred; rather, that it doesn’t occur with far greater frequency. And if the possibility remains that more such “glitches” will follow in the not-so-distant future, the chance also remains that the untangling of the botched trades may become more problematic the next time a similar event occurs.

Recently, there has been a lot of discussion in the financial press as to the viability of the VIX as a reasonable hedge against a downturn in the market. The VIX, known, though not necessarily affectionately, as the “fear gauge,” generally goes up as the market goes down and vice-versa. Appearing on the radar of an increased number of investors, the VIX has recently been trading at low levels not seen since just prior to the crash of 2007-08. This is generally accepted as an indication that a high degree of fear has been extracted from the market, at least for now. With both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index flirting with ’08 highs, this lack of fear may be somewhat understandable.

Whether you buy into this fearless paradigm or not, what remains true is that the best time to buy insurance is when it is at a discount and a low VIX price represents one version of that insurance price break, though hardly the only one.

However, what makes the VIX worthy of serious consideration right now is not merely the low price it currently finds itself at. Rather, it is the nature of both the VIX itself and the market in general.

The VIX is an explosive hedge, meaning that it reacts in an amplified fashion in regard to the extremity of a downside move in equities. If the market dives sharply, a quick glance at it the VIX chart reveals how fast and how far the fear gauge moves, making it a particularly valuable “Black Swan” type of hedge.

As for the market in general, virtually all trading volume is run through exchanges electronically; coupled with the fact that the majority of trades are now high frequency trades, both fast and furious, the recipe for mischievous glitches appearing and impacting the market will certainly rise.

Consider the VIX as one way to make a protective play against unruly machines.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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What the Market Wants: Good Start to a New Week

David Brown, Chief Market Strategist, Sabrient — Mon, 26 Mar 2012 22:37:32 +0000

Technology led today’s robust rally as the dollar continued to weaken. Financials, especially banks, remained strong the first three days of last week then fell to profit-taking on the final two days, ending down a little more than -0.5% for the week. Today, that sector regained all of that loss and advanced an extra 25 basis points to reach near multi-year highs, although it is still more than 50% off its early 2007 high.

From Bernanke’s comments today, investors gleaned that further monetary policy will remain in place (interest rates will stay low) despite improvements in employment. The S&P 500 responded with a +1.4% gain.

Last week’s pullback was mostly driven by weak Chinese economic releases along with poor European PMI readings. However, there was good news from domestic initial jobless claims which were lower than expected and at their lowest level in recent months.

It is interesting to note that during last week’s market weakness a number of companies reported well-above-expected numbers, but only those that also gave positive forward guidance actually were up. In fact, Tiffany (TIF) missed estimated earnings but guided forward estimates higher and rose nearly +5% on the week. Other strong quarters that were greeted tepidly include Nike Inc. (NKE), Oracle (ORCL), and FedEx Corporation (FDX). Financials that not only reported better-than-expected numbers, but also gained in price include Discover (DFS), up +6%, and Accenture (ACN), up +5%. So you either need to provide strong forward guidance or be a Financial or both to be treated well these days.

We continue to favor Large-cap stocks and the Financial sector, along with Technology. VXX continues to trade at historically low levels, and we favor it as a relatively low-risk hedge.

Here are the market stats.

4 Stock Ideas for this Market

This week, I created a custom search with MyStockFinder, emphasizing high value, high growth, long-term technical strength, high earnings quality, strong balance sheet, group strength, and only Large-caps. Here are four stock ideas for your consideration:

Discovery Communications, Inc. (DISCA)–Cyclical Consumer
Dick’s Sporting Goods, Inc. (DKS)–Cyclical Consumer
Valero Energy Corp. (VLO)—Energy
Discover Financial Services (DFS)—Financials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

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Rock Solid Yields (RSY): Buy AVCA at $5.59

Ron Rutherford, Corporate Macroeconomist, Sabrient — Mon, 26 Mar 2012 20:44:35 +0000

Advocat Inc. (AVCA) is rated Strong Buy by Sabrient for its excellent value and growth scores of 92.9 and 83.8 respectively (out of 100). With less-than-average market risk, it is expected to outperform the market significantly. AVCA’s accounting and governance ranks it at the top for conservative practices, which is noted by Sabrient rating AVCA at 82.5 for its Fundamental Score. Beneficial owners have been accumulating positions in this Micro-cap stock. Healthcare is a sector that RSY does not have a position in and would help balance the portfolio with this 4% dividend yielding stock.

Since it is a lightly traded stock, RSY recommends buying a small position of 400 shares at a limit price of $5.59 {good for the day}. The ex-dividend date is March 28, so this is a good time to capture a position in it now.

AVCA does not have options available but reviewing our open options shows that the Jun $80 Call for ARLP is down around $0.25 from our 1 option sold at $4.10. The bad news is that ARLP has dropped in price while capturing the option premiums. ARLP is rated Buy by Sabrient, and RSY recommends continuing to hold this position and wait for better prices to sell the position or use covered calls again.

Both TESS and BRKL do not have options available, but they are priced so that we can reduce our exposure while capturing some of the capital gains. RSY recommends selling half of each position as such: Sell 200 shares of TESS at $23.01 (GTC) and Sell BRKL 200 shares at $9.51 (GTC). Sabrient rates BRKL as a Hold presently and TESS as a Buy. This will result in a small gain in BRKL but nearly $2300 in gains from TESS on the 200 shares sold and nearly 100% in gains!

Best regards,
Ronald Rutherford
Corporate Macroeconomist

Full disclosure: The author holds or will hold the stocks mentioned in this edition of Rock Solid Yields.

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Sector Detector: Awaiting the next catalyst

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 22 Mar 2012 05:32:14 +0000

After last week’s technical breakout on elevated volume, stocks have flattened and trading volume has waned as investors seem to be waiting to see whether there will be a pullback to test new support levels and the bulls’ conviction. I think the bulls are plenty convicted—not conflicted.

New round-number resistance-turned-support levels are at 13,000 on the Dow, 3,000 on the Nasdaq, and 1400 on the S&P 500. The S&P was the last to breakout and the first to test support. In fact, it has been testing support at 1400 every day since it broke out last Thursday. So far this week, there has been little movement in any asset class as investors hold their positions and wait for the next catalyst. Gold, oil, and the U.S. dollar are all slightly down, 20-year Treasuries are slightly up, and stocks and the U.S. dollar are mostly flat. But the fact remains that there is little incentive to invest in low-yielding Treasuries right now.

Among the ten U.S. sector iShares, Consumer Goods (IYC) has been the strongest this week through Wednesday, up about +1%, followed by Technology (IYW), Telecom (IYZ), and Consumer Goods (IYK), while Energy (IYE) has been the decisive laggard, down about -2%. The big leader of last week’s technical breakout was the Financial sector, and IYF still displays the best overall performance since then.

With banks standing on firmer footing, the Fed is now allowing those that pass their “stress test” to boost dividends and buy back stock. And they are doing so. Some like Citigroup (C) and Sun Trust Bank (STI) have not yet passed the test, but others like Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB), and JP Morgan (JPM) are getting aggressive.

Again, I just can’t help but say something about Apple Inc. (AAPL) this week. It was just two months ago that I was talking about AAPL finally pulling back into a tie with Exxon Mobil in the largest-market-cap sweepstakes. Now the comparison is a distant memory as XOM has stayed flat at a little over $400 billion while Apple has soared 35% in two months to reach a market cap of over $560 billion.

As I pointed out last week, the “junk rally” phase we have been in might be foretelling an imminent pullback to “re-rationalize,” if you will. Higher quality stocks have been underperforming those that were beaten down or have high short interest. But quality will inevitably rise again.

Looking at the SPY chart, it closed Wednesday at 140.21. Last week, it blasted through resistance at 140 for the first time since mid-2008. It now finds itself right in the middle of its up-sloping channel that has been forming since late-December, with resistance around 142 and near-term support around 138. Below that, there is support from the longer-term uptrend line around 135, which also coincides with the rising 50-day simple moving average.

RSI, MACD, and Slow Stochastic are all pointed as if they want to cycle back down to oversold territory. But bulls might insist on churning in place to work off the short-term overbought conditions rather than pull back with any significance. Eventually, price will test its 50DMA for support, but it doesn’t have to happen anytime soon.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 15.13, which is just about exactly where it was last Wednesday, and it is comfortably below the important 20 threshold. In fact, it has remained in a range of 14-16 since the Dow and Nasdaq breakouts last Tuesday. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 39 bps, where it has held since mid-February after falling rapidly from near 60 at the beginning of the year. For now, this appears to be the level or credit risk at which investors are comfortable.

Yes, investors seem comfortable with the prospects for stocks and the economy right now. The biggest things that could throw investors into a tizzy are the usual: a sovereign debt default in Europe, a slowdown in China’s growth, or war in the Middle East (and the associated pinch in oil supplies). But the ECB seems willing to provide all liquidity necessary to prevent a default in Europe, the Chinese government stands ready with its stimulus machinery if necessary (and India’s industrial production is humming along), and Saudi Arabia is pledging to make up the difference in any world oil supply shortfall.

The Fed’s monetary policy appears to be keeping the U.S. economy afloat for now with lots of cheap cash. The next earnings season, which kicks off in mid-April, will tell a lot about corporate earnings impacts. If the market can maintain its low volatility by working off overbought technicals and absorbing the occasional bad news without giving back much in price, cash on the sidelines should continue to come into the market and support the bulls.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Technology (IYW) remains at the top of the Outlook rankings with an 81. IYW is particularly strong in its return ratios as margins remain high in tech products. It is also relatively strong in its long-term growth rate and in analyst positive sentiment.

2. Healthcare (IYH) moves up into a tie with Financial (IYF) for second place with a score of 64. Financial and Consumer Services (IYC) stocks are getting the most support from Wall Street analysts. With the big rally in Financials, the sector no longer reflects the lowest projected P/E, which has resulted in a lower Outlook score.

3. Energy (IYE) and Materials (IYM) have been beaten down and now reflect the lowest projected P/Es. IYM continues to get net earnings downgrades from the analysts.

4. Telecom (IYZ) remains at the bottom of the rankings with a 2. IYZ remains saddled with the worst return ratios and one of the highest projected P/Es. It is again joined in the bottom two by Utilities (IDU) with a score of 20. IDU has poor long-term growth projections and relatively high projected P/E.

5. Looking at the Bull scores, Financial (IYF), Industrial (IYJ), and Materials (IYM) are tied for the lead on strong market days, scoring 54. These three are the only ones scoring above 50. Utilities (IDU) is by far the weakest on strong days, scoring 35.

6. As for the Bear scores, IDU is the investor favorite “safe haven” on weak market days, scoring 56, followed by IYW and IYH at 54. IYM shows by far the lowest Bear score of 40. This means that Basic Materials stocks tend to sell off the most when the market is pulling back (which hasn’t been happening very often).

7. Overall, IYW still shows the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 183. IYZ is by far the worst at 97. IYW also shows the best combination of Bull/Bear with a total score of 102. IDU now has the worst combination at 91, with IYE close by at 92.

These scores represent the view that the Technology and Healthcare sectors may be relatively undervalued overall, while Utilities and Telecom sectors may be relatively overvalued based on our 1-3 month forward look.

Top ranked stocks within Technology and Healthcare sectors include VMware (VMW), TIBCO Software (TIBX), Halozyme Therapeutics (HALO), and DUSA Pharmaceuticals (DUSA).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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ETF Periscope: Low-Level “Fear Gauge” Makes VXX A Sweet Pairs Partner

Daniel Sckolnik, ETF Periscope — Tue, 20 Mar 2012 23:41:17 +0000

“It’s not wise to violate rules until you know how to observe them.” — T.S. Elliot

For the majority of 2012, the market has been acting like a fairly reasonable creature, as opposed to the nervous and jittery beast that dominated Wall Street for the second half of 2011.

Since December, when the European Central Bank finally came up with a big enough “bazooka”, in the form of its Long-Term Refinancing Operation (LTFO), to address the Eurozone banks liquidity crisis, investors have pivoted with rather surprising speed from risk-off to risk-on.

The result has been a strong and steady uptrend in the equity market, which has sent the key indexes soaring to heights not experienced since the financial crisis hit full force back in 2008.

In spite of the fact that the Dow Jones Industrial Average (DJIA) shed about 20 points on the final day of last week’s trading calendar, it is certainly worth noting that the Dow just finished a run of seven consecutive sessions that concluded in the black. For those who keep score of such streaks, it has been over a year since the Blue-Chip Index ran off that many winning sessions in a row.

Of greater significance perhaps is the fact that the benchmark Standard & Poor’s 500 Index (SPX) managed to remain above the psychologically significant 1,400 level, as it reflects a broader cross-section of the equity market compared to the far narrower DJIA.

Reflecting the high correlation of the European bourses with Wall Street, Europe’s equity market has also been seeing some of its best overall performance numbers in over eight months, when the fear of Greek contagion became the elephant–sized blip on the radar of concerned investors.

On Friday the SPX stayed above the 1,400 level it hit just last week, the first time since May 2008 it topped that lofty number. Meanwhile, European stocks hit their highest level since before the market’s slump in late July.

That investors are feeling more confident and less skittish at the moment can also be seen by a quick read of the VIX (Chicago Board Options Exchange Market Volatility Index), which is often referred to as the “fear gauge.” It continues to trade at the very bottom of its 12-month range, even hitting numbers that it hasn’t visited since 2007.

Some observers see this current round of investor complacency, as being reflected in the VIX, to be a sure sign that the market may be ripe for a correction and that the time for taking profits off the table may be close at hand.

However, the trend is inarguable, and how to play it remains the question.

As things currently stand, the mood on Wall Street seems to be, at least for the moment, robust enough to shake off the same stirrings and rumblings from both the EU and the domestic economy that, until the calendar flipped over to the New Year of 2012, would have sent sellers into panic and buyers off to the sidelines.

What the Periscope Sees

With the VIX remaining at a relative low point, it may be regarded as a reasonably priced portfolio hedge. At the same time, it may also be seen as the perfect match for a pairs trade, riding alongside your favorite Bullish play.

One example of such a trade might consist of using the VXX (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX near-term futures contracts, as a proxy for the volatility index, and pairing it with
XHB (SPDR Homebuilders ETF), which tracks the S&P Homebuilders Select Industry Index.

With a spate of housing data due to be reported this week, analysts are projecting some relatively positive numbers to emerge. It may finally be time for investors to consider adding some of this sector to their portfolio, if they haven’t already, particularly as there is a fair amount of headroom for the sector to travel.

One way to play this trade would be to go long both the XHB and the VXX. Another way to make the trade would be to buy call options for both the VXX and the XHB.

Two longs as a pairs trade? Sure.

What makes this so is the fact that the VIX generally goes up when the market dives, and vice versa.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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What the Market Wants: Banks Fairly Valued and Contributing to Market Strength

David Brown, Chief Market Strategist, Sabrient — Tue, 20 Mar 2012 00:00:18 +0000

Banks Fairly Valued and Contributing to Market Strength

Continuing last week’s strength, Financials and Technology led the market again today. Banks were up nearly +2% intraday, although they lost some of their steam when put-option trades in Financial ETFs reached 4-month highs. Last week, they roared ahead +7%, and they are now up more than +20% year-to-date.

The Financial sector was of course the leading sector last week and again today as our forward sector rating had forecasted last Monday. Lest you fear that banks could be topping, consider that the entire Financial sector had fallen nearly -80% from its mid-2007 high, and despite having nearly doubled over the last three years from its March 2009 low, the entire sector remains at less than 50% of its high in 2007.

Economic news continues to be slightly better than the month before. For example, retail sales were up a better-than-expected +1.1%, and the Empire Manufacturing Index came in at 20.2, its highest in more than a year. Price data was a tad higher-than-expected, but inflation remains under the Fed’s tight control. Initial jobless claims continued to improve although unemployment is still far from reasonable levels.

Here are the market stats.

Large-cap Value, not surprisingly, due to interest in the banking sector, led the market caps last week up +2.5%, and it also has the best monthly cap performance, +3.3%. The market continues to eschew Small-caps, with Small-cap Growth up only +1.2% last week and only +0.2% in the last month.

With our Sectorcast favoring Financials, Healthcare, and Energy, we like large-cap stocks from those sectors and avoid Utilities and Telecom. We continue to see the benefit of maintaining a hedge (no pun intended) in the face of unresolved global pressures and shaky domestic debt issues.

You might be interested in current valuations compared to last year’s May high. With the markets 4-6% above that high, surprisingly, valuations for our Sabrient Top 100 GARP stocks are still less than a year ago. The average P/Es of the Top 100, 300, and 1000 are at 9.1, 13.73, and 19.88 compared to 10.33, 13.13 and 18.33. Even better, the forward P/E of the Top 100 is only 7.54 compared to 8.23 in May 2011.

Even non-GARP P/Es are somewhat below historical averages.

4 Stock Ideas for this Market

This week, I created a custom search with MyStockFinder, emphasizing high value, high growth, high earnings quality, momentum, recent analyst revisions, dividend yield and only Large- and Mid-caps. Here are four stock ideas for your consideration:

Assured Guaranty Ltd. (AGO)–Financials
Reinsurance Group of America, Inc. (RGA)–Financials
Ameriprise Financial Inc. (AMP)—Financials
Cummins Inc. (CMI)—Industrials

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems, LLC.
Leaders in Investment Research
http://www.sabrient.com
Follow us on Twitter: http://Twitter.com/ScottMartindale

Full disclosure: The author does not hold positions in any of the stocks mentioned in this article.

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Dark Horse Traders’ Hedge: JCOM Gives Stocks a Bad Name, New Buy/Write Option Positions

Scott Brown, President, Sabrient — Mon, 19 Mar 2012 17:27:03 +0000

Shot through the heart

And you’re to blame, darling

You give love a bad name

An angel’s smile is what you sell

You promise me heaven and then put me through hell

Chains of love, got a hold on me

When passion’s a prison you can’t break free

You’re a loaded gun, yeah

There’s nowhere to run

No one can save me, the damage is done

Shot through the heart, and you’re to blame

You give love a bad name

Bon Jovi

Before I get into the reasons I believe J2 Global Communications (JCOM) “gives love (stocks) a bad name,” I want to recap the closing positions on Friday which I posted March 16, 2012.

In quick summary, Radware Ltd, (RDWR) was called away at $31 with a 34% gain since November 11, 2010. I posted in the March 5, 2012 article the series of option trades recommended to create a 34% gain in a stock which actually traded down from our original purchase price of $33.39 (final cost basis $19.59). Seagate Technology (STX) was called away at $21 with a 14% gain since January 29, 2012. I never complain about profits, but clearly this is a case where buy-and-hold would have yielded a higher profit than the option strategy.

Jabil Circuit Inc. (JBL) was called away at $21 with a 39% gain since January 27, 2011 on a position that we originally recommended at $20.56 (final cost basis of $12.89). Western Refining Inc. (WNR) was called away at $16 with a quick 17% gain on the buy/write strategy recommended on January 29, 2012 (final cost basis of $13.40). Xyratex Ltd (XRTX) was called away at $15 with a 22% gain after being recommended on December 17, 2010 (final cost basis $11.58). Lastly, we had to spend $0.12 to close the LDK Solar Co (LDK) Mar $5 put and sold to open the LDK Jun $5 put for $1.20.

March expiration closed 5 positions, and so we have cash to open new positions, long or short. Let me get back to the opening line of this article, which is the first of those positions, JCOM. The Grumpy Old Accountants published an article March 8, 2012 which details how many view JCOM as having “promised you heaven and then put you through hell.” The company has tried to pass off an accounting error as a change in estimate. The explanation(s) offered by the company seem to fail the sniff test of many experienced forensic accountants. If the SEC agrees with Gradient Analytics (which graded the earnings quality of JCOM an “F” on November 21, 2011) and others, then JCOM would be forced to restate prior year earnings. Herb Greenberg issued a “Herb Alert” on JCOM in November prior to the Q1 announcement.

Accounting issues aside, highly competitive pricing in the eFax business has caused a sharp decline since 2007 in revenue per customer for JCOM. The company has used acquisitions to grow revenues, but the core business earnings quality appears to be very suspect. “An angel’s smile is what you (JCOM) sell” and with the possible accounting errors also overhanging the company “you’re (JCOM) to blame,” causing me to say “you give love (stocks) a bad name.” My recommendation is to enter a short position in JCOM.

On the long side we want to get exposure to copper, which rallied Friday on the economic news. Freeport-McMoRan Copper and Gold, Inc. (FCX) is my choice as a proxy for exposure to copper. Based on Friday’s closing price of $38.56, we can obtain initial exposure at a forward P/E of 7.19. The 18 analysts following FCX anticipate $4.17 in earnings for 2012 and three have upgraded their estimates for the June quarter in the last 30 days. By selling the FCX May $40 call (FCX120519C00040000) for approximately $1.46 and selling the FCX May $40 put (FCX120519P00040000) for approximately $3.10, we can enter with an anticipated cost basis of $34 and a target of being called away (or rolling to a forward expiration) in May at $40.

Western Digital Corp. (WDC) is the second long position I would like to recommend. The 5-year expected growth rate by the 10 analysts following WDC is 20.09% and we can gain exposure (before using our buy/write strategy) at a forward P/E of 4.34. That is the kind of relationship between earnings growth to forward P/E we like to see. WDC also has $585 million in levered free cash flow, along with $3.92 billion in cash. As always, we want to buy ½ the number of shares we are willing to own at approximately $38.26 (Friday’s close). Then by selling the WDC July $40 call (WDC120721C00040000) for approximately $2.80 and selling the WDC July $40 put (WDC120721P00040000) for approximately $4.45, we can gain the exposure desired at an anticipated cost basis of $31.01 and a target of being called away (or rolling to a forward expiration) in July for $40.

Valassis Communications, Inc. (VCI) is worth long exposure, as 8 of 9 analysts who follow VCI have raised their 2012 earnings targets in the last 30 days, to $3.11. The forward P/E, based on Friday’s closing price of $24.01, is 6.8. VCI has a high short float of 16.2%, which could provide additional upside if the analysts are correct on their increases in earnings for the coming quarters and year. The options for VCI have good liquidity, and so I recommend entering ½ the long exposure desired in VCI and selling the VCI June $25 call (VCI120616C00025000) for approximately $1.50 and selling the VCI June $25 put (VCI120616P00025000) for approximately $2.50. We will have the desired long exposure at an anticipated cost basis of $20.01, with a target of being called away (or rolling to a forward expiration) in June for $25.

These 3 long positions (FCX, WDC and VCI) using the buy/write strategy and shorting JCOM give us “a loaded gun” again, and we still have one position to add in the short term.

Recommendations:

Short JCOM at the market, Monday March 19, 2012

Buy to open ½ desired shares FCX at the market, Monday March 19, 2012.

Sell to open FCX May $40 call at the market, Monday March 19, 2012.

Sell to open FCX May $40 put at the market, Monday March 19, 2012.

Buy to open ½ desired shares WDC at the market, Monday March 19, 2012.

Sell to open WDC July $40 call at the market, Monday March 19, 2012.

Sell to open WDC July $40 put at the market, Monday March 19, 2012.

Buy to open ½ desired shares VCI at the market, Monday March 19, 2012.

Sell to open VCI June $40 call at the market, Monday March 19, 2012.

Sell to open VCI June $40 put at the market, Monday March 19, 2012.

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A Macro View: Potential Stock Picks Based ISM

Ron Rutherford, Corporate Macroeconomist, Sabrient — Fri, 16 Mar 2012 23:22:14 +0000

Fair to Middling for Manufacturing, Good News for the Services Sectors
Manufacturing fell to 52.4%, missing the consensus range of 54%-55.5% and the consensus point of 54.6%. Economists had predicted a rise in the index of 0.5 but got slack results in all the sub-indexes with new orders down 2.7, production down 0.4, employment down 1.1, supplier deliveries down 4.6, and inventories at break even. But according to Econoday, “February’s rates are respectable and not that much different than January’s.” The most dramatic increase in the sub-indexes were found in prices, rising +6% to 61.5%. So the only good news was that the exports index was up +4.5% to 59.5%.

Non-Manufacturing ISM Report showed greater strength with the headline index rising 0.5% to 57.3% which was well above the consensus of 56% and on the high side of the consensus range of 54.5%-58%. Econoday’s summary was a little more reasonable claiming that this report was “very positive.” Although employment was down -1.7% to the still good level of 55.7% and supplier deliveries was down 1.5% to 49.5%, business activity jumped 3.1% to 62.6% and new orders continued its strong upward trend since October 2011 (52.4%) with an increase of +1.8% to 61.2%.

Déjà vu on prices and inflation concerns

Even though the manufacturing report showed weakness across the board, the price index and the number of commodities with rising prices did not subside last month. Below is a chart of the price indexes for both manufacturing and non-manufacturing from the Federal Reserve which shows a five-month trend upward for both sectors.

(Click charts to expand)

The following two charts also show recent upward trends from both reports for both total number of commodities rising in prices and multi-month commodities. It is not nearly as dire as the spring of 2011. These indexes are not seasonally adjusted so we can expect this recent trend to continue up. It looks more subdued, but that could change during the spring thaws.

Stock Picks Based on Manufacturing Index with Subindexes
The regression formula I used for the following stocks picks included the headline index of the manufacturing index as well as five of the sub-indexes of the manufacturing report (employment, new export orders, new orders, and price) and all within the Fama-French 3 factor model. This creates quite a few regressors, and along with raising the limits on sectors and industries, it created longer lists of potential candidates than previous runs. The list of “Lovers” (those that love a rising manufacturing index) was then weeded down to those stocks rated a Strong Buy by Sabrient Systems. (Complete list available upon request.)
Valero Energy Corporation (VLO)
Baker Hughes Incorporated (BHI)
Cummins Inc. (CMI)
Newfield Exploration Company (NFX)
Avery Dennison Corporation (AVY)
Tesoro Corporation (TSO)
WellPoint, Inc. (WLP)
EOG Resources, Inc. (EOG)
Mattel, Inc. (MAT)
Macy’s, Inc. (M)
Ford Motor Company (F)
Cliffs Natural Resources Inc. (CLF)
SunTrust Banks, Inc. (STI)
Eastman Chemical Company (EMN)
MetLife, Inc. (MET)
Bank of America Corporation (BAC)
Prudential Financial, Inc. (PRU)
Wynn Resorts, Limited (WYNN)
American International Group, Inc. (AIG)
Discover Financial Services (DFS)
Goodyear Tire & Rubber Company (GT)
Principal Financial Group, Inc. (PFG)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Daniel Sckolnik Quoted on VIX ETFs in Institutional Investor

Walter Gault, Communications Editor, Sabrient — Thu, 15 Mar 2012 16:30:11 +0000

Sabrient’s own Daniel Sckolnik was quoted in an Institutional Investor article yesterday titled, Time to Buy VIX ETFs?. They took particular interest in his weekly publication, ETF Periscope, where Daniel has been regularly recommending the VIX, specifically the VXX (iPath S&P 500 VIX Short-Term Futures ETN) and the VXZ (iPath S&P 500 VIX Mid-Term Futures ETN), as a hedge.

“With the VIX trading at levels not touched on since 2007,” he told Institutional Investor in an email on Wednesday, “it remains a great opportunity to acquire relatively ‘cheap’ insurance against sharp drops in the market that may occur due to an Israeli strike against Iran, a disorderly Greek default or a less obvious ‘Black Swan’ event.”

A more in-depth discussion of the risks mentioned above can be found in Sabrient’s MacroReport.

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Sector Detector: Another technical breakout as bulls build their army

Scott Martindale, Sabrient Systems and Gradient Analytics — Thu, 15 Mar 2012 05:31:25 +0000

Well, the bulls took that minor pullback last week, and rather than wait for a test of support at the uptrend line, they jumped right in and brought a few more friends along for the ride. Rather than fearing that their run is over, bulls held their ground and found support from bears throwing in the towel (i.e., short-covering) as well as investors sitting on cash who just couldn’t bear (pardon the pun) to watch the train leaving the station without them. Never has the phrase “Don’t fight the Fed” been more predictive, particularly when the Fed is joined by virtually every other central bank in the world.

Look, I can’t deny the dangers pointed out by the doomsayers. I absolutely can appreciate the view that the market (and the economy) has become a house-of-cards. It may well turn out that we have chosen to avoid enduring a little discomfort now in exchange for severe pain in the future. The eventual unwinding of the central bank balance sheets most likely won’t be pretty.

But for now, as long as the world remains awash in fiat currency, U.S. stock market fundamentals on balance look pretty good. I just have not seen any indications that a market crash scenario is imminent. My regular readers know that I have been in the bullish camp for quite awhile, dating back to last fall when the market was trying to break out of a long trading range with resistance around 1220 on the S&P 500. It closed Wednesday at 1391. Sabrient’s SectorCast-ETF rankings of the 10 sector iShares have leaned cautiously bullish for several months, and the charts have been decidedly bullish.

I have been saying that a breakout through resistance levels of 13,000 on the Dow, 3,000 on the Nasdaq, and 2011 highs on the S&P 500 would be difficult without elevated volume, and that is what we got. Financial stocks led the way, which is quite important to the sustainability of the rally. Bank of America (BAC), JP Morgan (JPM), Wells Fargo (WFC) and others all broke out of technical patterns on huge volume. Technology, too, has been quite strong, and IYW continues to sit atop the Sabrient rankings, followed by Financial (IYF).

Speaking of Tech, I can’t help but talk about Apple Inc. (AAPL) again this week. The stock was up another 4% on Wednesday on big volume. It was just last month that it crossed the $500 threshold, and now it is already approaching $600, as its new iPad 3 delights the world and sucks in more Apple converts and as analysts project huge growth in emerging markets. This is nearly a 50% gain year-to-date and 580% in the three years since the March 2009 market lows. For the largest market cap company in the world, such rapid appreciation is truly amazing. This company is a true leader in every sense of the word, including in the stock market.

From a historical standpoint, volume is still relatively light, but it jumped well above recent levels on this technical breakout, and that was all the bulls needed to attract reinforcements, build on their conviction, and chase away the bears. Now we watch for a possible pullback to test support at those former resistance levels.

Now that the breakout has occurred, I’m seeing lots of bullish headlines imploring us to get onboard the train and predicting targets like Dow 14,000 / 15,000 / 17,000. Even some of the formerly bearish or ultra-cautious commentators are throwing in the towel and switching sides (which worries me a bit). Besides Financials and Technology, they are suggesting buying gold miners, steel producers, oil, and oil producers.

Indeed, looking at the Sabrient quant models, it does appear that the Basic Materials stocks are undervalued. The IYM displays the lowest projected P/E among the 10 sector iShares, Sabrient’s favorites in this space include Companhia Siderurgica Nacional (SID), Cliffs Natural Resources (CLF), Globe Specialty Metals (GSM), and Kronos Worldwide (KRO). In fact, GSM and KRO are members of Sabrient’s “Baker’s Dozen” Top Stocks for 2012: http://sabrient.com/individuals/Bakers-Dozen-2012-Signup.html

Moreover, it appears that GARP (Growth At a Reasonable Price) and quality-oriented rankings are underperforming as long/short strategies this year due to the “junk rally”—in which stocks that have been beaten down or have high short interest outperform due to speculation and short-covering during a “risk on” phase. This often occurs near the tail end of powerful rally.

During the fourth quarter of 2011, high-quality stocks easily outperformed. But so far in 2012, we have seen many lower-quality names outperforming. Does this indicate a “blow-off top,” which would portend an end to the rally? Perhaps. Or it might simply be the prelude to a long-awaited technical consolidation, after which the higher quality stocks will again take a leadership role. Another possibility is that the market will find a way to rotate back into quality names without giving up much ground. But in any case, a return to quality will happen—it always does so eventually.

Looking at the charts, SPY closed Wednesday at 139.91 after blasting above 140 on Tuesday for the first time since mid-2008. Last week, it made a false breakout above that tough resistance level at 137 before making a false breakdown through the near-term uptrend line. But rather than continuing down to test the long-term uptrend line, it quickly reversed again, and now it appears to have its sights set on the top of the channel shown.

RSI, MACD, and Slow Stochastic each made a brief attempt to complete a cycle back down to oversold territory, but the bulls were too enthusiastic to wait. The short-term technicals are once again overbought, but as we have seen, they can stay that way for a long while as the market creeps higher. Nevertheless, the overbought conditions will likely keep the magnitude of further up-moves in check. In other words, don’t expect many huge days like we got on Tuesday until the market consolidates.

The VIX (CBOE Market Volatility Index—a.k.a. “fear gauge”) closed Wednesday at 15.31, which is comfortably below the important 20 threshold. After a brief visit above 20 last week, it fell quickly, indicating a persistence of investor confidence and complacency. The TED spread (indicator of credit risk in the general economy, measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) closed Wednesday at 39 bps. It has held right around the 40 level since mid-February after falling rapidly from near 60 at the beginning of the year. This, too, reflects investor confidence—although it is still well above the teens we saw early last year.

As a group, these three scores can be quite helpful for positioning a portfolio for a given set of anticipated market conditions.

Observations:

1. Technology (IYW) remains at the top of the Outlook rankings with an 83. IYW is particularly strong in its return ratios as margins remain high in tech products. It is also relatively strong in its long-term growth rate and in analyst positive sentiment.

2. Financial (IYF) retains its hold on second place and crept up further to score a 75. Healthcare (IYH) moves back into third with a 61. Financial and Consumer Services (IYC) stocks are getting the most support from Wall Street analysts, but IYF is also maintaining a low (desirable) projected P/E ratio.

3. Telecom (IYZ) remains at the bottom of the rankings with a 17. IYZ remains saddled with the worst return ratios and one of the highest projected P/Es. It is again joined in the bottom two by Utilities (IDU) with a score of 19. IDU has poor long-term growth projections and relatively high projected P/E.

4. With economically sensitive Technology, Financial, Industrial, and Consumer Services all in the top 5, the rankings are looking decidedly bullish.

5. Looking at the Bull scores, Financial (IYF), Industrial (IYJ), and Materials (IYM) are tied for the lead on strong market days, scoring 53. These three are the only ones scoring above 50. Utilities (IDU) is by far the weakest on strong days, scoring 32.

6. As for the Bear scores, IDU is back as the investor favorite “safe haven” on weak market days, scoring 58, followed by IYC at 54. IYM shows by far the lowest Bear score of 40. This means that Basic Materials stocks tend to sell off the most when the market is pulling back (which hasn’t been happening very often).

7. Overall, IYW still shows the best combination of Outlook/Bull/Bear scores. Adding up the three scores gives a total of 184. IDU is the worst at 109. IYW shows the best combination of Bull/Bear with a total score of 101. IDU now has the worst combination at 90, with IYE close by at 91. Also notable is that IYJ and IYH are very close in total scores, but they are nearly opposite on their Bull and Bear scores as one is clearly defensive (IYH() and the other aggressive (IYJ).

Top ranked stocks within Technology and Financial sectors include Yandex N.V. (YNDX), Qihoo 360 Technology (QIHU), Banco Latinoamericano de Comercio Exterior S.A. (BLX), and Apollo Commercial Real Estate Finance (ARI).

Disclosure: Author has no positions in stocks or ETFs mentioned.

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Sabrient Systems’ “Number Crunching” favored by Barrons

Walter Gault, Communications Editor, Sabrient — Wed, 14 Mar 2012 22:44:37 +0000

Today’s online edition of Barrons’ Focus on Funds featured a “pile” of Sabrient ETF plays on the Banking sector.

These indices were intially recommended in Sabrient’s newest product, The MacroReport, which is co-published with MacroRisk Analytics (MRA), a firm that provides scientifically tested methodology for measuring the economy’s influence on investment prices. The MacroReport combines Sabrient’s quantitative equity expertise with MRA’s macroeconomic expertise, and marks Sabrient’s expansion into thought leadership with actionable macro-risk scenarios.

Each month, The MacroReport focuses on a specific macroeconomic situation or global area, with updates throughout the month. The March report focuses on the Eurozone and explores the following possible scenarios:

No Greek Default
Orderly Greek Default
Disorderly Greek Default
Iran War

The report offers actionable ideas in the form of portfolios of stocks or ETFs that should perform well in related environments.

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ETF Periscope: Fed Unlikely to Go Bold, Content to Leave Drama to the Greeks

Daniel Sckolnik, ETF Periscope — Tue, 13 Mar 2012 16:14:31 +0000

“The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time.” — Mark Twain

Wall Street will once again look towards the Fed for signs of a promise, no matter how vague, of QE3. And, like a Rorschach test, investors will pretty much interpret Tuesday’s scheduled statement from the Federal Open Market Committee (FOMC) in a way that matches their own expectations.

In lieu of any clear and bold pronouncement, the FOMC will likely play coy, expressing general content with the current direction of the market, thereby indicating that nothing of note needs to be changed, and that the current level of growth is acceptable.

It would be highly unusual for the Fed to effectively contradict itself, and Ben Bernanke has already staked out his position last month, during the course of his testimony on Capital Hill. While there, he shared his stony visage with the members of the House Financial Services Committee, gracing their presence with his reasoning on why an additional round of more-or-less free money is not really required at this time.

So far this year, the majority of domestic labor reports has mainly supported the growth paradigm and in turn would seem to support Bernanke.

It was not too long ago that economists thought that the Fed had run out of arrows in its quiver, and the expectations by investors that they are even considering pulling the trigger on additional quantitative easing would seem to reveal a large shift in sentiment towards the ability of the Fed to impact the domestic economy in a positive way.

There is, of course, another factor that could change the dynamic created by the Fed, no matter what it might prove to be. That, of course, is the small matter of the Eurozone.

Both Wall Street and the European bourses seem to have bought into the whole story that Greece is on the mend simply by virtue of having secured enough funds to pay its March credit bill. With an adequate number of private bondholders having just agreed to take a communal “haircut” of 53%, the Greek government has managed to knock off a sweet 105 billion in euros from its outstanding debt. This action now provides Greece with restricted access to 130 billion euros in new loans, based upon the most recent deal cut between Athens and the Eurozone leaders.

The problem is that additional conditions imposed upon the Greeks are likely to go unfulfilled. The notion that the Greek citizenry will subject itself to a further round of austerity measures seems almost nonsensical. And with national elections just around the corner, there is no shortage of politicians willing to give voice to a country already in a certified recession. If the elections bring in a wave of new leaders who won’t agree to continue the harsh conditions required of the current deals, then the possibility of a default by Greece will once again rear its ugly head, like a Hydra right out of Greek mythology.

Of course, the Fed may say all the right things, and the Dow Jones Industrial Average (DJIA) might shoot up past the 13,000 mark, the S&P 500 Index (SPX) past 1,400, and the Nasdaq Composite Average (COMP) past 3,000. In such a scenario, the Eurozone could continue to play its very recent role of second fiddle to a more positive market sentiment, and the Bulls could keep the current trend intact.

So, say it’s QE3, please, FOMC.

ETF Periscope

Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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