Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Dow Jones

The Dow Jones Industrial Average, or Dow Jones, is a weighted index representing the stock price action of 30 of the largest U.S. corporations. It is the world’s most widely followed stock market index. The Dow Jones Industrial Average was created on May 26, 1896 and is named after Charles Dow and Edward Jones. The earnings and revenues of large corporations are often leading economic indicators. Hence, economists often look at the Dow Jones Industrial Average as an indicator of economic activity. If the index is hitting new highs, economic activity can be expected to be brisk in the next six months. Comparatively, if the index is falling to new lows, poor economic times could lie ahead.

What This Company’s Earnings Say About the Broader Market

By for Profit Confidential

Company’s Earnings Say About the Broader MarketFedEx Corporation (FDX) just bounced off a new record-high on the stock market and is an important component of the Dow Jones Transportation Average.

In its fiscal first quarter of 2015 (ended August 31, 2014), the company’s sales and earnings surged. It was a great quarter and a strong indicator for the rest of the market.

Total revenues grew six percent to $11.7 billion. This may not sound like a lot of growth, but it is for such a mature enterprise in a very competitive industry.

But the big news was the company’s strong earnings growth. Net income grew 24% over the same quarter last year to $606 million. Diluted earnings per share grew 37% to $2.10, of which $0.15 per share of the total was due to share repurchases during the quarter. The company bought back 5.3 million of its own common shares in its fiscal first quarter and no shares remain now under existing repurchase authorization.

Each of the company’s three main operating divisions posted solid gains in revenues and operating earnings.

Higher rates are not affecting demand. In fact, FedEx is experiencing higher revenue per package including increases in residential and fuel surcharges, and this is going right to the bottom-line. And rates are going up by an average of 4.9% at the beginning of 2015 for FedEx Express, FedEx Ground, and FedEx Freight, which cover most of North America, Hawaii, Puerto Rico, and the U.S. Virgin Islands.

What the company didn’t do in its latest earnings report was increase its existing financial guidance for fiscal 2015. But this isn’t unusual for management to underplay their … Read More

Why the Old School Dow Theory Still Applies

By for Profit Confidential

The Most Important Stocks to FollowGetting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.

The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.

The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.

Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.

Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.

Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.

The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.

The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More

House Prices to Decline in 2015?

By for Profit Confidential

House Prices to Decline in 2015As we progress to the end of 2014, my skepticism towards the U.S. housing market increases. In fact, the fate of home prices in 2015 is in question.

I don’t expect an outright collapse of the housing market like the one we saw in 2007, but I see the momentum in housing prices that began in 2012 and picked up in 2013 dissipating for several reasons.

First, according to Fannie Mae’s August 2014 National Housing Survey, the number of Americans thinking “it’s a good time to buy a house now” has hit an all-time low!

The chief economist at Fannie Mae, Doug Duncan, explained it best when he said, “The deterioration in consumer attitudes about the current home buying environment reflects a shift away from record home purchase affordability without enough momentum in consumer personal financial sentiment to compensate for it. This year’s labor market strength has not translated into sufficient income gains to inspire confidence among consumers to purchase a home, even in the current favorable interest rate environment.” (Source: “Consumer Housing Sentiment Loses Momentum as Income Growth Remains Stagnant,” Fannie Mae, September 8, 2014.)

Secondly, while in 2012 and 2013 we saw a massive influx of financial investors enter the housing market—they bought entire city blocks and bid home prices higher—these investors are no longer as active in the housing market simply because all the “good deals” are gone.

Look at the red arrow I have drawn in the below chart of the S&P Case-Shiller Home Price Index.

S&P Case-Shiller Home Price Index Chart

Chart courtesy of www.StockCharts.com

In the chart, you see that since April (where the arrow appears), home prices in the … Read More

One Group of Stocks Investors Can’t Ignore

By for Profit Confidential

Stocks That Really MatterSo long as transportation stocks are ticking higher, the stock market is much less susceptible to a price retrenchment.

The Dow Jones Transportation Average just blew past 8,500, recently hitting a new record-high after taking a well-deserved break around mid-July and August.

Airline stocks led the index’s recent price strength. Some examples: JetBlue Airways Corporation (JBLU) was $8.00 a share in May, now it’s pushing $13.00. Meanwhile, Southwest Airlines Co. (LUV) was $20.00 a share at the beginning of the year, recently hitting a price of more than $33.00 for a new all-time record-high.

But it isn’t just airline stocks that are doing well on the Dow Jones Transportation Average; railroad stocks and trucking companies are pushing through to new highs, too, and earnings estimates for a lot of these companies are increasing, especially for 2015.

It may seem like an old-school concept, but strength in transportation stocks is still a leading indicator for the broader market. Price strength in these stocks often shows up at the beginning of a new business cycle.

Union Pacific Corporation (UNP) is one of my favorite railroad stocks for investors and it’s a great benchmark for determining your investment strategy, even for those not interested in the company. Monitoring this stock is a great way to gain market and economic intelligence.

This position still has good potential for further capital gains and earnings forecasts have been going up across the board—including estimates for the company’s third and fourth quarters, all of 2014, and all of 2015.

The stock’s been in a well-deserved price consolidation since May, but it recently broke out of this trend … Read More

Another Warning Sign: Stocks Hit Highs on Collapsing Volume

By for Profit Confidential

The Only Bear Left StandingSo the S&P 500 has touched the 2,000 mark.

Will the S&P 500 continue to march to new highs?

Well, my opinion towards the stock market hasn’t changed. I remain skeptical for a variety of reasons, many of which I have shared with my readers over the past few months.

But I have a new concern about the stock market, something that hasn’t been touched on by analysts: trading volume is collapsing.

Please look at the table below. It shows the performance of the S&P 500 and its change in trading volume.

Year Performance Change in Volume
2012 11.73% - 17.58%
2013 14.50% - 24.91%
2014 8.40% - 44%*

*Until August 25, 2014

Data source: StockCharts.com, last accessed August 25, 2014

Key stock indices like the S&P 500 (it is the same story for the Dow Jones) are rising as volumes are declining, suggesting buyers’ participation in the stock market advance is very low. For a healthy stock market rally, any technical analyst will tell you that you need rising volume, not declining volume.

It’s Economics 101: rising demand pushes prices higher. In the case of the S&P 500, we have declining demand (low trading volume) and rising prices. Something doesn’t make sense here.

Looking at the economic data, it further suggests key stock indices are stretched. We continue to see the factors that are supposed to drive the U.S. economy to deteriorate.

Just look at the housing market. The number of new homes sold continues to decline. In January, the annual rate of new-home sales in the U.S. was 457,000 units. By July, it was down more than 10% … Read More

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