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

Posts Tagged ‘bull market’

What Investors Need to Know About the Current Market Cycle

By for Profit Confidential

What These Large-Caps Are Revealing About the Current Stock Market CycleIf there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.

This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.

And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)

The stock actually offers a pretty decent dividend. It’s currently around 2.6%.

While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.

The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.

Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.

Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.

Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More

What Do This Quarter’s Mixed Earnings Results Mean?

By for Profit Confidential

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible.

While earnings are managed, over time, a business can’t manufacture success unless it’s a fraud (which, sadly, does happen).

Big companies have the operational leverage and the cash to keep boosting their earnings per share. Oracle’s latest financial results were uninspiring, and while recognizing that this is a very mature business with growing competition in the cloud, the position advanced a material 10 points since last June—this seems so overdone…. Read More

Why Stocks Won’t Break Until This Indicator Does

By for Profit Confidential

The One Indicator Keeping This Market AliveThe Dow Jones Transportation Average keeps powering ahead, and the rest of the stock market is very close behind it.

The strong performance of this index is confirmation of further Dow theory gains. The Dow Jones Industrial Average has been fighting its way higher since May 20.

Some of the performances of transportation stocks have been truly spectacular and very much a reflection of a bull market.

Alaska Air Group, Inc. (ALK) just bounced off $100.00 a share. It was $50.00 a share late June last year.

Union Pacific Corporation (UNP), which has been one of my favorite benchmark stocks for gauging industrial economic activity and the stock market, is right around $200.00 a share. (See “Buybacks, Dividends, Stock Splits: Business Is Getting Better for This Must-Watch Stock.”)

It was $150.00 a year ago, which is a very good capital gain for such a mature large-cap enterprise.

And Southwest Airlines Co. (LUV) just hit an all-time record-high, about double what it was trading at this time last year.

The Dow Jones Transportation Average is old economy, but it is a very meaningful gauge for the rest of the stock market. I advise all investors to follow the index on a frequent basis. The broader market is highly unlikely to break down without a commensurate move in transportation stocks.

The NASDAQ Composite and Russell 2000 can certainly be more volatile, but generally speaking, so long as the Dow Jones Transportation Average is holding up, so will the rest of the market.

Since the financial crisis, big corporations have been very unwilling to invest in new operations. But in what … Read More

Biotechs, Small-Caps, and IPOs: Making Sense of This Peculiar Stock Market

By for Profit Confidential

This Year's Peculiar Market Short Exuberance RiskThe spot price of oil has been eerily steady for quite some time; this is quite unusual for the world’s most traded commodity.

It’s been a peculiar year in capital markets, and there’s definitely an uncertainty in sentiment, especially in the equity market with no real trend for investors to latch onto. It makes me think that equity investors should be proactive now and take a hard look at their portfolios for investment risk.

Speculative fervor has been reduced and while small-cap stocks, initial public offerings (IPOs), biotechnology stocks, and super-high-valued stocks have taken it on the chin, this is not unreasonable for the longer-run trend in equities.

The Dow Jones Transportation Average just hit another record-high and its long-term chart, while impressive, actually looks kind of scary. The capital gains are tremendous since the March 2009 low, which begs the question as to when it’s going to reverse.

Historically, most of the average’s declines have come in the form of short bursts of downside, peppered by several multiyear periods of non-performance.

The stock market is highly unlikely to break down without a commensurate move in transportation stocks. But there is clearly room for downside in these share prices. Delta Air Lines, Inc. (DAL) has doubled in value since just last September.

Caution. Caution. Caution. If you eliminate the bubble capital gains produced by stocks comprising the S&P 500 index during the late 1990s and their price recovery during the mid-2000s, the long-term chart still reveals an incredible performance. The crash of 1987 now looks like a blip. The 100-year chart of the S&P 500 is featured below:

S&P 500 Large Cap Index Chart

Chart Read More

Multi-Month Price Consolidation in the Cards

By for Profit Confidential

How Profit Choppy Market HighThere still is no real trend in the equity market. One day, stocks sell off big-time; the next, the S&P 500 and Dow Jones Industrial Average hit new record-highs.

This is a very tough market to figure; anything can happen when monetary policy is highly accommodative.

A lagging NASDAQ Composite isn’t a worry. Neither is the Russell 2000 index. Stocks won’t come apart so long as so many large-caps are pushing their highs.

And not all technology stocks are retrenching, either. Some of the old technology bellwethers are actually doing quite well these days. Microsoft Corporation (MSFT) is trading right at a multiyear high, with a 2.8% dividend yield and a forward price-to-earnings ratio of approximately 14.

Even Intel Corporation (INTC), which is having a pretty tough time generating much in the way of top-line growth, is recovering on the stock market and is very close to breaking out of a multiyear price consolidation. Intel currently offers a 3.4% dividend yield and is not expensively priced.

One day, stocks are reacting to geopolitical events in Ukraine; the next, it’s Chinese economic data, then it’s mergers and acquisitions…

If anything, the reaction to first-quarter earnings was pretty muted. But even though the beginning of the year started out with considerable downside, stocks recovered strongly after policy reassurance from the Federal Reserve. While the action’s still choppy, underlying investor sentiment is holding up.

This is a market that continues to favor existing winners, but not necessarily at the speculative end. (See “Risk vs. Reward: Is It Time to Cash Out of This Bull Market?”) The reticence that launched blue chip … Read More

The Only Place to Put New Money in Today’s Economy

By for Profit Confidential

Invest New Money During a Stock Market's HighA lot of stocks are rolling over, breaking their 50- and 200-day simple moving averages (MAs). This is a tired market that could very well consolidate or correct right into the fourth quarter.

And the economic data has been softer, as well. Throw in geopolitical tensions with Russia and we have the makings of a material price retrenchment.

There’s still resilience, however, in some of the most important stock market indices. Stocks composing the Dow Jones Transportation Average are holding up extremely well, especially compared to the Russell 2000, the NASDAQ Biotechnology index, and the NASDAQ Composite index itself.

While the main market indices are mostly flat on the year, I don’t think investors can expect any capital gains until perhaps the fourth quarter.

From my perspective, relative price strength in the Dow Jones industrials, transportation stocks, and most of the S&P 500 index means that the longer-run uptrend remains intact.

With speculative fervor still coming out of initial public offerings (IPOs) and select biotechnology stocks, this action is an indicator of a tired market that’s long in the tooth, as investors are clearly less willing to speculate on those stocks that don’t offer income or relative safety in their earnings.

Risk aversion won’t kill a secular bull market. But it does mean that risk-capital opportunities are a lot less plentiful. Currently, among speculative stocks, one of the only sectors still experiencing decent price action is oil and gas drilling and exploration.

This is still a market that I think favors existing winners—blue chips, in particular. (See “Top Stocks for the Coming Correction.”)

These are the stocks to … Read More

Top Stocks for the Coming Correction

By for Profit Confidential

The stock market is getting soft quickly, but it’s to be expected. Even days when the main indices open positive, action turns down regularly; it’s a sign of things to come.  I wouldn’t be surprised if stocks stay soft until the fourth quarter. In an environment of mixed economic data and modest corporate earnings, that’s just something for which investors should be prepared.  Plenty of companies reported a solid first quarter and reiterated their outlooks for the year. But current action isn’t about corporate earnings or monetary policy. Stocks are in need of a break. A prolonged consolidation, if not a full-blown correction, is perfectly normal in the context of a secular bull market.  Leadership in technology stocks is breaking as evidenced by the performance of the NASDAQ Composite. It’s also evident in the Russell 2000 index of smaller-cap companies and the NASDAQ Biotechnology index.  For stocks to really rollover, the Dow Jones Transportation Average will have to retreat as well; so far, it’s still holding up due to the strong price action in airlines and most railway companies.  But while transportation stocks have consistently been at the forefront of market leadership, the whole group is due for a break as well.  I still see the best opportunities with large-caps and dividend paying stocks, especially, even though there’s not a lot of buying at this particular point in time. And this takes into consideration investment risk as well. Portfolio risk becomes much more important when stocks stop performing, and this is what I expect to happen over the next several months. (See “How Past Investment Trends Predicted This Stock Market Action.”)  Given current information, with a meaningful price retrenchment in the main stock market indices, it should be a buying opportunity.  Corporate balance sheets are mostly in excellent condition and the cost of capital remains low. Companies are still reticent to make major new investments, so the prospects for rising dividends going into 2015 are very good.  Since the beginning of this year, speculative fervor has come out of the biotechnology stocks and initial public offering (IPOs), which is a classic signal that the market is gearing up for a change in trend.  But it’s all normal in what was an exceptional year for stocks in 2013. The system, in a sense, is still trying to balance itself out after those exceptional capital gains.  Near-term, price consolidation in the main market indices is a good time to re-evaluate portfolios and to make lists of those stocks you might like to own if they were better priced.  Some of the stocks I like that would be worthy of consideration if there is an upcoming price consolidation/correction include: Johnson & Johnson (JNJ), 3M Company (MMM), Union Pacific Corporation (UNP), PepsiCo, Inc. (PEP), The Walt Disney Company (DIS), NIKE, Inc. (NKE), Kinder Morgan Energy Partners, L.P. (KMP), and Colgate-Palmolive Company (CL).  The investment theme remains blue chip, with economies of scale to boost earnings and excess cash to boost dividends.  Anything can happen in a stock market still under the influence of pronounced monetary stimulus. Potential near-term shocks to the system include geopolitical events, more currency troubles in Latin America, and/or another surprise in the banking system.  Corporate results and their outlooks are holding up. But a tired market for stocks is just that—tired. The prospects for capital gains near-term are diminishing significantly.The stock market is getting soft quickly, but it’s to be expected. Even days when the main indices open positive, action turns down regularly; it’s a sign of things to come.

I wouldn’t be surprised if stocks stay soft until the fourth quarter. In an environment of mixed economic data and modest corporate earnings, that’s just something for which investors should be prepared.

Plenty of companies reported a solid first quarter and reiterated their outlooks for the year. But current action isn’t about corporate earnings or monetary policy. Stocks are in need of a break. A prolonged consolidation, if not a full-blown correction, is perfectly normal in the context of a secular bull market.

Leadership in technology stocks is breaking as evidenced by the performance of the NASDAQ Composite. It’s also evident in the Russell 2000 index of smaller-cap companies and the NASDAQ Biotechnology index.

For stocks to really rollover, the Dow Jones Transportation Average will have to retreat as well; so far, it’s still holding up due to the strong price action in airlines and most railway companies.

But while transportation stocks have consistently been at the forefront of market leadership, the whole group is due for a break as well.

I still see the best opportunities with large-caps and dividend paying stocks, especially, even though there’s not a lot of buying at this particular point in time. And this takes into consideration investment risk as well. Portfolio risk becomes much more important when stocks stop performing, and this is what I expect to happen over the next several months. (See “How Past Investment Trends Predicted This Stock Read More

Two Big Trends to Emerge This Earnings Season?

By for Profit Confidential

The Two Big Themes This Earnings SeasonLots of companies have broken out of their previous long-term trends on the stock market, and it’s a positive, contributing signal to a secular bull market.

One company that recently beat Wall Street consensus and just broke out of its previous price trend is A. Schulman, Inc. (SHLM) out of Akron, Ohio.

This business deals with resins and plastic compounds. It’s not very exciting, but the company is growing, it pays a dividend, and its corporate guidance is rising.

A. Schulman is one of the few companies that actually file their SEC Form 10-Q commensurate with their earnings press releases. It’s something that’s very much appreciated because this information is typically more in-depth than a plain earnings report. Even if you aren’t interested in the resins and plastics business, what a company like A. Schulman says about its business conditions is helpful in shaping your own market view.

The company just reported solid growth in its second fiscal quarter of 2014 (ended February 28, 2014). Management said that business in Europe is getting better, with noticeable sales gains in the automotive and electronics markets.

Most of the company’s sales come from Europe, the Middle East, and African regions, which is often described by the acronym EMEA. Sales to these countries gained 12% in the most recent quarter to $383 million.

Sales in the Americas grew nine percent to $157 million, but they would have been stronger if not for foreign currency impacts, particularly in Argentina. Management is also de-emphasizing commodity-related sales, which are less profitable. Asia Pacific (APAC) sales grew 67% to $48.4 million, mostly due to an acquisition.

Last … Read More

Stock Market Setting Up for Extended Break?

By for Profit Confidential

Soft Q1 Suggesting Market Set for Extended BreakThe S&P 500 index really hasn’t done much since the beginning of the year but churn…but then again, why shouldn’t it?

For stocks, 2013 was an exceptional year. If we get another positive year on top of dividends, then it’s total gravy.

The capital gains over the last several years have been highly unusual, representative of the gains often seen after a major financial crisis.

There are no bandwagons to jump on in this stock market. Investor sentiment finally had a bit of an awakening over the last several weeks. Big investors booked some profits after the big price recovery in February, which occurred because of verbal reassurances by the new Fed chair, Janet Yellen. If there wasn’t further hand-holding from the Fed, stocks likely would have continued January’s sell-off into a full-blown correction, helped by events in Ukraine.

I’m of the mind that the stock market may take an extended break over the next two quarters, as it’s so often done in the past—probably more of a price consolidation over a correction; top-line growth is still pretty modest.

I’m still a big fan of dividend income and also a higher weighting given to cash within a portfolio context. Very little stands out in this stock market as an exceptional buy. There are some exciting innovations in the marketplace, but valuations for many of these stocks are still way off the charts.

Precious metals continue to prove themselves as an unreliable asset class. Spot prices are stuck and all-sustaining mining costs per ounce are still going up. It’s a tough road ahead for precious metals stocks.

But this is … Read More

Does Risk Trump Returns in This Stock Market Environment?

By for Profit Confidential

Why Risk Now Trumps Stock Market ReturnsGoing by the choppy trading action this year, investment risk with equities is going up.

Recent shocks to the system include events in Ukraine and Crimea, Chinese economic data, and Citigroup Inc.’s (C) failed stress test.

This is a very uneasy stock market, and because the main indices are right around their highs, any shock has the potential to deliver a serious haircut to asset prices. The choppy, trendless action combined with full valuations is the reason why I’ve been advocating taking profits from speculative positions. This stock market is just plain tired out.

First-quarter earnings season is just around the corner, and while it’s looking like we’ll get more of the same from corporations (a meet-or-beat on only one financial metric, revenues or earnings) the stock market needs more than dividends and share buybacks in order for share prices to keep appreciating.

Blue chips, especially, have been coasting along, providing single-digit earnings growth on modest sales. The icing on the cake has been the rising dividends and share repurchases, which the stock market has eaten up over the last two years.

But sentiment is slowly changing regarding share repurchases. Big investors want to see more than these financial tools in the businesses they own. Rising dividends are always great, but you need underlying revenue and earnings growth to sustain the case. And in order to do so, corporations have to make new investments. They’ve been very reticent to date.

Healthy balance sheets are always desirable, but new business investment and innovation is what creates wealth over the long-term. Everything’s been short-term thinking the last few years, and companies … Read More

New Transportation Growth Story Worth Following

By for Profit Confidential

These Stocks a Kink in Bearish SentimentIf there’s one industry sector that’s volatile, cyclical, often unprofitable, and typically attracts poor consumer ratings, it’s the airline sector.

But this group of transportation stocks is a powerful indicator. Airline stocks move at the beginning of bull markets and new business cycles. The airline sector has been on fire lately.

A top performer and recent new listing is Spirit Airlines, Inc. (SAVE). Based out of Miramar, Florida, Spirit Airlines is a low-fare operator flying to 50 destinations in the U.S., Latin America, and the Caribbean with some 250 flights per day. The stock was listed May 26, 2011.

This is a growth story that could not have been timed more perfectly. The stock is soaring based on strong growth in revenue passenger miles and improving load factors. It’s a momentum stock you should have on your radar now.

Airline stocks are very good at losing money, but not at the beginning of a new business cycle, which I believe is where we are at this time.

The fact that most airline stocks have been appreciating strongly on the stock market based on real, underlying economic growth is a big positive. If airlines are making money, the bears face another big obstacle.

As mentioned, Spirit Airlines is a growth story. The company is generating the kind of numbers you might associate with a fast-growing technology stock. This is a story of the right business in the right place at the right time. The company’s stock chart is featured below:

Spirit Airlines ChartChart courtesy of www.StockCharts.com

Spirit Airlines generated fourth-quarter 2013 revenues of $420 million, representing a gain of 28% over the same … Read More

Risk vs. Reward: Is It Time to Cash Out of This Bull Market?

By for Profit Confidential

Time to Cash Out of This Bull MarketEver since Janet Yellen, the new Chair of the Federal Reserve, made her first speech reiterating a stay-the-course policy regarding monetary policy, stocks got a whole new lease on their financial life.

This market is holding up extremely well, and the action proves that institutional investors will bid stocks if there is certainty. It’s a bull market characteristic. So long as Fed policy stays the course (which includes the tapering of quantitative easing) and there are no major external shocks, the “great reflation” should continue, if not more modestly than last year. (See “Making Sense of the U.S. Economy in 10 Short Points.”)

Fighting the Fed as an investor in stocks is typically not profitable. The current business and monetary cycles are going to change, but it’s not going to happen overnight.

The first quarter of 2014 is almost over and another earnings season is on the horizon. While quarterly earnings results are managed, after monetary policy, corporate numbers are the big news.

Playing a market that’s at an all-time high is extremely difficult. Price momentum can often surprise with its duration, especially in an environment of tremendous monetary ease.

But practically, it’s difficult to consider loading up on new positions after a five-year period of very respectable capital gains from the March low in 2009.

Optimism is a key attribute for any successful entrepreneur, and the expectation for positive outcomes is most certainly a real component of capital markets, especially with stocks.

My sense is that first-quarter earnings results will be quite lackluster, with domestic companies especially reflecting a tough winter.

Buying stocks is all about the … Read More

My Top Investment Strategy for a Stalling Stock Market

By for Profit Confidential

How to Guarantee a Selling Price for Your StockThe current stock market sentiment is bullish and based on the charts, there are indications that the market wants to go higher, especially technology and small-cap stocks.

The S&P 500 is eyeing another record-high and it may just reach it by the time you read this.

While stock market investor sentiment continues to display bullish new highs and new lows, there’s also a sense that the road to higher gains will not be an easy path.

The economic renewal is maintaining a muted pace, in part due to the harsh winter conditions, but what if the economy was actually showing signs of slowing?

Jobs growth in February improved over January, but the jobs market still has not reached a level of self-sufficiency without continued help from the Federal Reserve via low interest rates.

What I expect, after looking at the stock market indices, is that we will likely see new records broken on the horizon. (Read “Why I Believe the S&P 500 Could Easily Reach 2,000 in the Upcoming Months.”) However, the advance will be more hesitant than in 2013 and the past years, since the current bull market is into its fifth year and is very much absent of a major stock market correction, based on my technical analysis.

Given this, I’m somewhat nervous, but there are alternative investment strategies you can consider at this time.

If you feel the stock market may pause and trade in a sideways range through the spring and summer months, you may look at writing covered call options on some or all of your existing long positions that have associated options…. Read More

Contrarian View: Is the Bull Market Really Just Beginning?

By for Profit Confidential

Did the Current Bull Market Really Start in 2013There is some resilience to this stock market, and it’s evidenced by the strength in many important indices.

The Dow Jones Transportation Average is a very important index, even if you don’t own—or aren’t interested in owning—any component companies. The reason for its importance is that it has a track record of leading the rest of the stock market. And it’s especially useful as an indicator of a bull market breakout.

Transportation stocks have a history of leading the economy and the stock market. Dow theory, in my view, is alive and well, and it’s worthwhile to track the index to help with your overall market view.

Lots of commentators view the stock market as having been in a bull market since the March low of 2009. I don’t see it that way.

I view the stock market’s performance since that low (no matter how it was induced) as a recovery market, not the beginning of a new secular bull market or cycle for stocks.

The breakout, from my perspective, was around the beginning of 2013, when institutional investors ignored all the risks (including the inability of policymakers to actually make policy) and decided to bid blue chips and transportation stocks with particular fervor.

The previous stock market cycle was a 13-year recovery cycle from the technology bubble that produced over-the-top capital gains until 2000. The stock market recovered from the massive sell-off only to be hit by the financial crisis and Great Recession.

A long-term chart of the S&P 500 is featured below:

$SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Last year’s stock market performance was genuinely stunning; while the monetary … Read More

Reaching the Point of Maximum Optimism

By for Profit Confidential

Bear Market Twists News to Lure in More InvestorsThis past Friday, the Bureau of Labor Statistics reported 175,000 jobs were added to the U.S. economy in the month of February. (Source: Bureau of Labor Statistics, March 7, 2014.)

The way the media reported it…

“Friday’s jobs market report caught the market by surprise,” was what most media outlets were telling us via their untrained reporters. The expectation was an increase of 149,000 jobs in February (after a dismal December and January jobs market report) and so the usual happened—stocks went up and gold went down on a jobs market report that was only slightly better than what was expected.

The consensus, from what I read, is that the jobs market in the U.S. economy is getting better. Of course, I think of this as hogwash. And as I’ll tell you in a moment, this is the kind of misinformation that is characteristic of what happens in a bear market in stocks, not a bull market.

Within February’s jobs market report, we find:

The long-term unemployed (those who have been out of work for six months or more) accounted for 37% of all the unemployed in the U.S. economy. The longer a person is unemployed—likely because that person has not been re-trained for the jobs market—the less likely it is that person will eventually find work.

Today, once a person becomes unemployed in the U.S. economy, that person remains unemployed for an average of 37 weeks! This number remains staggeringly high. Before the financial crisis, this number was below 15 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 7, 2014.)

When you have a … Read More

« Older Entries
Enter your e-mail address to subscribe to
Profit Confidential — IT'S FREE!
Enter e-mail:
ALSO RECEIVE A FREE COPY of our exclusive report:
"A Golden Opportunity for Stock Market Investors"