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

Posts Tagged ‘Dow Jones Industrial Average’

Should You Be Buying More Gold Ahead of the ECB’s Printing Decision?

By for Profit Confidential

The European Central Bank Presents Another Reason to Be Bullish on GoldFrom our recent reader survey, I see our readers are not that concerned about what happens in the eurozone. But there’s a phenomenon occurring there that I believe every investor who is interested in gold bullion should be aware of.

Let me explain…

It’s a known fact that when central banks print more of their paper money, it’s usually bullish for the yellow metal. We saw this after 2009, when the Federal Reserve started to print more paper money; gold bullion prices skyrocketed.

In the eurozone, there continues to be major economic problems in the region. Italy, the third-biggest economic hub in the eurozone, has reported its unemployment rate hit 13% in February—the highest unemployment rate ever recorded in the country. (Source: Reuters, April 1, 2014.)

To help countries like Italy, Greece, Spain, and Portugal with their economic woes, the European Central Bank (ECB) has lowered its benchmark interest rate—but that hasn’t spurred bank lending as bad debts on the books of major eurozone banks keep piling up. Even once-strong eurozone countries like France are under economic scrutiny.

Now, as no surprise, the ECB has started talk about following the same route the Federal Reserve has taken—printing paper money.

At a conference last week, one of the ECB’s Executive Board members, Yves Mersch, said the ECB is ready to turn on its printing presses. The president of the ECB, Mario Draghi, has also said quantitative easing in the region may be needed if inflation in the eurozone continues to remain subdued. (Source: Reuters, April 7, 2014.)

Hence, to the printing presses of the Federal Reserve, the Central Bank … Read More

Two Most Important Charts on Stocks You Will See This Year

By for Profit Confidential

What a Bubble Looks LikeThis month marks the fifth year of the rally in stocks that started in March of 2009. Back then, the Dow Jones Industrial Average traded as low as 6,400 and uncertainty was severe. In the midst of all this, a buying opportunity of a lifetime was born. I told my readers to buy close to when the market bottomed in March of 2009.

Five years later, the opposite is happening. I continue to believe the stock market is reaching a top; I continue to tell my readers stocks are very risky. The upside potential for the stock market is diminishing and the risks of a severe downside move are increasing: preserve your capital is my message now.

From March of 2009 to the end of February 2014, the S&P 500 has gone up about 155%. Other indices like the Dow Jones Industrial Average and NASDAQ Composite have shown similar—if not better—performances.

But as key stock indices soar, we are seeing the fundamentals that traditionally drive stocks higher weaken. Corporate insiders are dumping stocks at an alarming rate; corporate earnings growth has dropped to its slowest pace since 2009; the Volatility Index is near the low it was at just before stocks collapsed in 2007; and margin debt on the NYSE has reached a record high—all very bearish factors.

And from a technical point of view, something interesting has also happened on the key stock indices. Below is the weekly chart of the S&P 500.

$ SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Since the beginning of 2012, there hasn’t been any major correction or pullback in the stock market and trading volume has steadily … Read More

If This Indicator Turns, the Stock Market’s in Trouble…

By for Profit Confidential

Factors Now Creating a Positive Backdrop for This Stock MarketWith the stock market jittery due to geopolitical events, its underlying strength is highlighted by the relative outperformance of the NASDAQ Composite, the Dow Jones Transportation Average, and the Russell 2000. If these indices are doing relatively better than the S&P 500 and Dow Jones Industrial Average, then there is still an underlying strength to a market that hasn’t experienced a material correction for far too long.

The stock market has done a very good job of recovering from January’s sell-off. Certainty from the Federal Reserve, fourth-quarter earnings results that were modest but mostly met expectations, and strong corporate balance sheets are providing a decent fundamental backdrop. The stock market can have another decent year if it isn’t sidetracked by some sort of lasting shock.

The other indicator that is not directly related to the stock market but certainly is worth taking note of is the spot price of oil. Oil prices have been holding quite solidly above the $100.00-per-barrel level.

Stronger oil prices are a reflection of their own specific fundamentals, but they’re also a barometer or gauge on the part of speculators regarding future economic activity. The spot price has brought back a lot of oil stocks that recently sold off and valuations are creeping up close to previous levels (which was very expensive for Bakken oil stocks).

I maintain a positive outlook for the stock market given current fundamentals and recognize, of course, that geopolitical events can turn investor sentiment on a dime. If the stock market were to experience a substantial price correction right now, I would view it as a buying opportunity.

Earnings estimates for … Read More

Strength in These Stocks a Classic Signal of Bull Market Momentum?

By for Profit Confidential

What Strength in These Stocks Is Telling UsThe NASDAQ Composite index sold off significantly in January to around 4,000. Then it recovered to its current level at 4,300, which is a pretty substantial move.

For a number of months now, the NASDAQ has been outperforming both the S&P 500 and Dow Jones Industrial Average. This relative outperformance continues to be a positive overall sign regarding sentiment.

I don’t really expect much from stocks this year, although the prospect of rising dividends still remains very good in the bottom half. 2013’s stock market performance was so exceptional and so substantial, especially among blue chips, that it’s time for earnings to catch up with share prices.

Not to be excluded, the performance of the Russell 2000 index has also been relatively strong compared to larger-caps. But this index still can’t quite keep up to the outperformance of the NASDAQ.

Stock market leadership from large-cap technology stocks is always a good thing. And a lot of it has been from older brand-name companies, the kind of former fast-growing stocks that are now almost income plays.

Oracle Corporation (ORCL) has been on the comeback trail after several quarters of disappointing results. This position has been treading water since the beginning of 2011, and its recent breakout on the stock market is not immaterial. The company’s five-year stock chart is featured below:

Oracle Corp. NYSE Chart

Chart courtesy of www.StockCharts.com

Following a similar trading pattern over the last several years, Microsoft Corporation (MSFT) has recently been strong. The stock is up $10.00 a share over the last 12 months, and Wall Street earnings estimates have been going up across the board for this fiscal year and … Read More

Stock Prices and U.S. GDP; Historic Relationship Turns Bearish

By for Profit Confidential

Historic Relationship Tur​ns BearishIn the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)

But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.

Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)

This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.

S&P 500 Large Cap Index ChartChart courtesy of www.StockCharts.com

The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.

Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More

How to Play the Growth in China

By for Profit Confidential

Why Investors Shouldn't Bypass ChinaFor the first time in more than three years, Chinese stocks are beginning to show some promise for growth investors looking for opportunities outside of the United States.

The benchmark Shanghai Composite Index has moved to just above its close of 2013; hence, it’s more or less in line with the S&P 500 and Dow Jones Industrial Average.

Many of you are aware of my continued bullishness for China, as I have talked about this in recent commentaries.

We saw some encouraging estimates on Tuesday. The country’s industrial output is estimated to rise 9.5% this year, which could support gross domestic product (GDP) growth of 7.5%, according to Industry and Information Technology. (Source: “China targets factory output growth of around 9.5 percent in 2014,” Reuters, February 17, 2014.) What’s interesting is that the key areas of growth for this year include telecommunications, along with a big jump in business for software and information technology (IT).

You can play the growth in these areas via Chinese IT services firms, such as iSoftStone Holdings Limited (NYSE/ISS, $5.15, Market Cap: $297 million), a provider of IT services to clients and globally. Services include consulting and solutions, IT services, and business process outsourcing. The company is growing with its headcount increasing 27% to 17,702 in the third quarter compared to the same time in 2012. Broken done, 65.1% of the company’s global sales came from the Greater China area, 21.4% were from the U.S., Europe accounted for 7.3%, and Japan made up 5.8%.

Analysts expect iSoftStone to report revenue growth of 13.6% to $432.81 million in 2013, followed by 17.8% to $510.06 million … Read More

If There Ever Was a “Buy Low, Sell High” Play, This Is It

By for Profit Confidential

Only Place I See Value in this Stock Market TodayWhen it comes to investing, history has taught us one very important lesson: ideal buying opportunities are formed when there’s significant pessimism towards an investment. In other words, to make it really big, you need to have the guts to buy an investment when everyone else is selling it…when it’s completely out of favor with the majority of investors.

While the general stock market is up close to 150% since March of 2009, there is only one investment that has been hard hit over the past couple of years. Long-time readers of Profit Confidential know exactly what I’m talking about: the shares of quality gold producers have taken it on the chin.

The contrarian in me couldn’t be talking louder; “buy when there’s blood on the street.” Very few investors like gold producers right now. In fact, the Dow Jones U.S. Gold Mining Index is down 60% since October 2012. Over the same period, the Dow Jones Industrial Average has risen nearly 30%. Gold stocks have fallen at twice the rate industrial stocks have risen. This is a rarity.

But the reasons to own the gold producers are becoming more compelling each day.

After putting on a relatively flat performance in 2012 and then declining in 2013, gold bullion prices now appear to be bottoming out. This can be great news for the gold producers whose stocks really trade on the rise and fall of gold bullion prices. The higher gold bullion prices go, the higher the profits of quality gold producers and the higher their stock prices go.

“Michael, it’s not good enough just to say gold bullion prices … Read More

What Cars and Stocks Have in Common These Days

By for Profit Confidential

All of a Sudden 2014 Looks a Lot Like 2007Mom and pop investors bought lots of stocks last year as the key stock indices reached all-time highs. By late 2013, the fear of “missing out” on future stock market gains was back. Sound similar to 2007?

According to the Investment Company Institute, investors bought $160.9 billion worth of stock mutual funds in 2013. This was the first time since 2007 when these types of mutual funds saw inflows. In 2007, investors bought $73.9 billion worth of long-term stock mutual funds. (Source: Investment Company Institute web site, last accessed February 11, 2014.)

And stock advisors are outright optimistic. For example, Birinyi Associates Inc.’s Laszlo Birinyi, a well-known money manager, is saying that the S&P 500 will hit 1,900 by the next quarter (it’s at 1,820 now). His argument: don’t bet against stocks because they have too much momentum. (Source: BusinessWeek, February 10, 2014.) Back in 2007, we heard many bullish calls for higher stock prices; we heard calls from well-known stock advisors saying key stock indices like the Dow Jones Industrial Average would hit 20,000 (seven years later, it’s stuck at 16,000).

One way I gauge optimism and complacency in the marketplace is by accessing auto sales. Car sales in the U.S. economy have reached 2007 levels again, and there are predictions that they will grow even further. After almost going bankrupt, the automakers are making all kinds of money again, paying their people very well once more. The new CEO of General Motors Company (NYSE/GM) will be paid $14.4 million in 2014, 60% more than what the previous CEO of the company made. (Source: Reuters, February 10, 2014.) … Read More

Uncertainty in Emerging Markets Creating Certainty in Only One Market

By for Profit Confidential

This Is the Only Play that Will RewardFasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!

I’m being too bearish? Not after you read this…

In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.

While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)

The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.

But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.

China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)

European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More

What Happened on Yellen’s First Day on the Job

By for Profit Confidential

Why Stock Market Bulls Should Be WorriedFebruary 4 was a terrible day for key stock indices. The S&P 500 and the Dow Jones Industrial Average plummeted by more than two percent each and broke below important support levels.

That day was also Janet Yellen’s first day on the job as chief of the most important central bank in the world.

Was Wall Street giving Yellen a message? Was that message, “Think twice before pulling back on money printing”?

While the severity of the sell-off in the stock market in January and into February of this year has caught many by surprise, to us, it was one more of those “I told you so” moments. And it should have been of no surprise to our readers at all, since we’ve been “singing the blues” of an overpriced and overbought market for months.

Here are four important points my readers need to know about the stock market:

Looking at the bottom of the chart below, you will clearly see an increase in stock market trading volume. As the stock market went down in January and into February, volume increased. When volume rises sharply during a stock market downturn, it means panic selling is setting in. February 4, 2014, was the highest volume day on the Dow Jones Industrial Average in about five months.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

Secondly, the Dow Jones Industrial Average has fallen below its 200-day and 50-day moving averages, as I’ve circled in the chart above. This move is considered bearish among technical analysts and suggests stock market sentiment is turning negative very quickly.

Thirdly, insiders continue to aggressively dump the stocks of the companies … Read More

Strategies for Defending Your Portfolio in a Down Market

By for Profit Confidential

What Investors Can Learn from the Super BowlIf you watched the boring Super Bowl game on the weekend, you’d have realized that a strong and superior defense can go a long way against a sound offense. But the battle in the trenches was easily won by the defense, and it’s an analogy I use in my trading strategy.

January ended on a sour note, being the first down month since August 2013. With the losses, we are now witnessing an uprising of the bears suggesting 2014 will be a negative year for the stock market. This reasoning is based on the Stock Traders’ Almanac that suggests there is a 46% chance of losses this year. I’m not convinced the stock market is heading lower, but the current stalling and inability of the stock market to move higher is a red flag. Despite an extremely oversold technical condition, I have yet to see any signs of strong buying support emerge—and in my view, this is worrisome and likely means more losses.

The irony in January was that the S&P 500 and Dow Jones Industrial Average actually lost more ground than the higher-risk NASDAQ and Russell 2000, which only lost 1.76% and 2.89%, respectively.

The key will be to watch how the S&P 500 reacts at its key support levels around 1,750 to 1,775. We already saw a bounce off this level, and now the index is staging a retest. As I have said in a recent commentary, failure to hold could see the index fall to 1,700, based on my technical analysis.

The stock market is failing to see any major positive catalyst. Earnings season has been average … Read More

Stay Calm, Keep Watch: How to Profit from Rising Market Fear

By for Profit Confidential

Stock Market About to Move to More Interesting LevelsWe are seeing some extreme nervousness building up around the stock market as investors scramble to the exits, fearing the next big market collapse is upon us.

The anxiety level is high, as indicated by a surge in the Chicago Board Options Exchange (BOE) Volatility Index (VIX), but the world isn’t coming apart, as many investors and analysts are thinking. There will, however, be some turbulence in the weeks and months ahead, as I said in my annual assessment back in January.

With the easy money flow starting to decline after the Federal Reserve announced its second straight $10.0-billion slash from its monthly bond buying at its FOMC meeting last week, it’s not a surprise to see fear in the stock market rising.

We all knew the easy money made in the stock market in 2013 was an aberration and was artificially driven by the central banks of the world; we all knew that this year would be more difficult.

Look, we are not going to see 20%–30% gains this year in the stock market. Instead, as I sit here and look at my screens, what I see is a buying opportunity emerging in the stock market. As long as the economy continues to advance as indicated by the fourth-quarter gross domestic product (GDP) growth of 3.2% announced last week, I’m encouraged.

As I discussed in previous commentaries, I want the stock market to return to some degree (even just a smear) of normalcy in which gains are based on the underlying fundamentals, and less on the Fed.

The selling in the emerging markets is expected, given the Fed’s cuts. … Read More

Why Copper Prices Are Collapsing

By for Profit Confidential

Economic Growth Falls to 2009 LevelCopper prices are collapsing, a sign that manufacturing activity in the global economy is slowing.

The chart below shows copper prices are down more than five percent so far this year. Notice the steep decline in copper prices starting this January.

Copper is a major commodity used as a material ingredient in a wide variety of manufactured goods. If copper prices are declining, which means demand is falling, we get an early indication that manufacturers are producing less because customer demand is soft.

At the same time, in another startling development, the Baltic Dry Index (BDI), the next chart below, has collapsed 50% from the beginning of the year.

Copper - Spot Price (EOD) Chart

Chart courtesy of www.StockCharts.com

The BDI basically tracks shipping prices of raw materials in the global economy. When the BDI declines, it means fewer goods are being shipped in the global economy, a sign that the worldwide economy is slowing.

Baltic Dry Index (EOD) Chart

Chart courtesy of www.StockCharts.com

Last but not least, as we have been hearing in the news, the emerging markets in the global economy are in trouble.

Manufacturers in the global economy, not being able to sell enough to developed countries like the U.S. and Europe, were hoping to sell more of their goods to once “fast”-growing emerging markets. But now, economic growth in these countries is slowing, too.

Russia, one of the major emerging markets in the global economy, reported its 2013 economic growth rate was the lowest since 2009! The Russian Federal Statistics Service said the economy grew by 1.3% in 2013 compared to 3.4% in 2012. (Source: Bloomberg, January 31, 2014.)

Other emerging markets like India and China have … Read More

Stock Market: The Great Collapse Back to Reality Begins

By for Profit Confidential

The Great Collapse Back to Reality Begins“The trade” was very easy to do not long ago. Anyone with the basic knowledge of how money flows could have done it and profited.

Of course, I’m talking about the Federal Reserve “trade.” The investment strategy was straightforward: borrow money at low interest rates in the U.S., then invest the money for higher returns in emerging markets and bank the difference. If you could borrow money at three percent per annum in the U.S. and invest it for a six-percent return in emerging markets like India, why wouldn’t you?

The “trade” created a rush to emerging markets. And if you didn’t like the emerging markets, you could have invested in the stock market right here in the good old U.S.A. Again, borrowing money at a low rate to buy stocks from companies that were buying back their own stocks at the same time the Fed flooded the system with cold hard cash…how could you go wrong? (No wonder the rich got richer during the Fed’s quantitative easing programs.)

But, as I have written so many times, parties can only last for so long. Eventually, someone takes away the punch bowl. And from the looks of it, the Federal Reserve has pulled its own punch bowl.

In its statement yesterday after its two-day meeting, the Federal Reserve said, “…the Committee (has) decided to make a further measured reduction in the pace of its asset purchases…” (Source: Federal Reserve, January 29, 2014.)

In summary, the Federal Reserve will be buying $65.0 billion worth of bonds in February following its reduced $75.0 billion in purchases in January following its $85.0 billion-a-month bond … Read More

Why I’m Not Running for the Market Exits Just Yet…

By for Profit Confidential

Investors Worry in 2014I received calls last Friday morning asking what was going on with the stock market and was it the foreshadowing of a sell-off Armageddon. Of course, my immediate response was, “What’s the big deal?” After the staggering advance in 2013, a sense of entitlement was expected in the stock market that the easy gains would continue to come in 2014.

Recall what I wrote at the beginning of the year in my annual assessment, when I said the easy money to be made in the stock market was a thing of the past. (Read “Where the Gains Will Be in 2014.”)

Yes, it’s not going to be as simple as a money printing machine this year. The Dow Jones Industrial Average lost 175 points last Thursday and was down another 185 points by midday on Friday. Down in five of six sessions, the index recorded its worst week since June 2012.

Investors are asking if this is the stock market correction I was calling for. Well, let’s see… If the loss holds from last Friday, the Dow would have corrected by about three percent in just over a week. That’s a good start, but I want to see more. That’s not because I’m negative on the stock market since I feel stocks will advance higher this year; it’s because I want to see a healthier stock market correction before I jump in and buy on the weakness.

We have seen five-percent adjustments over the last few years, and in each case, the stock market subsequently rallied to new record highs.

The reality is that the stock market failed … Read More

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