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

Posts Tagged ‘dow jones’

Why It’s Time to Cull Your Stocks

By for Profit Confidential

Still Buying Stocks StopGood numbers are one thing, but stocks did go up in advance of what’s turning out to be a fairly decent earnings season.

It’s not unreasonable at all to expect the market to take a solid break, perhaps for the next two to three months. Of course, predicting corrections and/or consolidations among stocks is a difficult endeavor in an era of extreme monetary stimulus. The Federal Reserve is slowly chipping it away, but it remains very committed to helping capital markets, especially as the economic data continues to be pretty soft.

Stocks are still looking stretched and this market is tired. A 10% to 20% correction would be a healthy development for the longer-run trend. Stocks need a catalyst for this to happen. It could come out of nowhere, and I’m reluctant to be a buyer with so many positions trading at record-highs.

Johnson Controls, Inc. (JCI), a large U.S. auto parts manufacturer, had a modestly positive third fiscal quarter with sales growing three percent to $10.8 billion due to more sales in China.

The company had some one-time restructuring charges during the quarter. Earnings per share from continuing operations (excluding restructuring and one-time items) grew a hefty 17% to $0.84. Management confirmed its full-year guidance, which pleased the Street, but the position is breaking down a bit.

E. I. du Pont de Nemours and Company’s (DD) numbers were uninspiring and the company tried to keep investors interested with a four-percent increase to its quarterly dividend. The position’s starting to roll over and with agriculture being such an important part of the company’s business, changing preferences among farmers hurt its … Read More

How Many Warnings Can You Give?

By for Profit Confidential

Why Stocks Will Not End 2014 WellI’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:

The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.

Insiders at public companies are selling stocks (in the companies they work for) at a record pace.

The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).

The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).

Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).

The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.

The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)

And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”

How many warnings can you give investors?

Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More

Your Top Priority When Investing in a Record-High Market

By for Profit Confidential

What to Prioritize with Stocks at an All-time HighStocks are going to gyrate around second-quarter earnings, but that’s exactly what this market needs—the corporate bottom line and expectations for the rest of the year.

With so many stocks trading at their all-time record-highs, I view investment risk in equities as being high at this time.

This is actually a tough environment in which to be an investor looking for new positions. There’s not a lot of value around and good businesses have already been bid.

It’s been years now since the stock market was first in need of a material price correction, and the next one will probably come out of nowhere.

It could be a shock from the Federal Reserve, but the central bank has been extremely delicate in how it effects and communicates monetary policy. More likely, stocks will be vulnerable to an unforeseen shock like a geopolitical event or a big derivative trade gone bad.

The risks are out there and stocks are long overdue for a reckoning.

With this in mind, I’m still a fan of the market’s existing winners, especially dividend-paying blue chips. In the absence of a shock, I think they’ll just keep pushing new highs going right into 2015.

3M Company (MMM) is an enterprise worth following and owning as a long-term, income-seeking investor.

The company’s earnings are material and offer good market intelligence, even if you aren’t interested in owning the stock.

The position has tripled in value on the stock market since the beginning of 2009, while also paying some great dividends.

The stock is still strong in the current environment, and the company represents exactly the kind of … Read More

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

The Downside to Dow 20,0000

By for Profit Confidential

Where the Stock Market Could Head NextWith the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.

These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.

Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.

Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.

One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.

The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.

In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.

In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More

A Stock Market Break? These Indices Say No

By for Profit Confidential

These Turning Indices Show How Stocks Can Go HigherThe great monetary expansion is still alive and well and the effect on equity securities continues to be profound.

But what I find striking about the stock market’s continued advancement is that it’s blue chips that are pushing through to new record highs.

Speculative fervor in several sectors has diminished, but hasn’t completely disappeared. But it’s the big brand-name companies—a lot of which pay dividends—that just keep on trucking as institutional investors buy earnings safety and outlook reliability, and are betting on revenue and earnings acceleration going into 2015.

Union Pacific Corporation (UNP), a benchmark railroad stock, just hit another new record high on the stock market, breaking through the $100.00-per-share level. It was $35.00 a share this time in 2010.

And this from an old-economy, industrial enterprise that is probably not on many investors’ wish lists.

Amazon.com, Inc. (AMZN) broke down considerably at the beginning of the year when it was trading around $400.00 a share. It recently broke $300.00 a share, but has bounced back significantly and the position looks to be fighting hard.

And this is one of the speculative stocks on which investors booked their profits. This stock is on the comeback trail and so are Cisco Systems, Inc. (CSCO), The Priceline Group Inc. (PCLN), Oracle Corporation (ORCL), Apple Inc. (AAPL), and Google Inc. (GOOG).

The stock market has been digesting continued mediocrity in domestic economic data and slightly more positive numbers from China. Institutional investors are buying. I think that, in the absence of some kind of shock or new catalyst, the stock market can slowly keep grinding higher. It could very well turn … 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

The Worst Kept Secret on Wall Street

By for Profit Confidential

Why Retail Stocks Will Get Hit the HardestIn the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!

As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.

Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)

But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.

The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.

Dow Jones US General Retailers Index ChartChart courtesy of www.StockCharts.com

The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.

All … 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

When the Cows Go Out for Slaughter a Second Time

By for Profit Confidential

When the Cows Go Out for Slaughter a Second TimeDid you see this story in the Wall Street Journal last Friday?

“Retirement investors are putting more money into stocks than they have since markets were slammed by the financial crisis six years ago… Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March… That is the highest percentage since March 2008…” (Source: Wall Street Journal, May 2, 2014.)

You read that right. With stocks at a record-high (and valuations stretched), retirees are pouring back into stocks. Are they getting ready to get slaughtered again? I believe so.

If you are a long-term reader of Profit Confidential, you know my take: the “bear” has done a masterful job at convincing investors the economy has recovered and the stock market is a safe place to invest again. Meanwhile, nothing could be further from the truth.

We are living the slowest post-recession recovery on record. And that recovery has been manipulated by the tampering of the Federal Reserve. You see, the Federal Reserve played a key role in driving the key stock indices higher. In 2009, in the midst of a financial crisis, the central bank started printing money and buying bonds. This resulted in lower bond yields. Those who had money in bonds, who had essentially paid nothing, moved into stocks.

And those record-low interest rates enabled companies in the key stock indices to borrow money and issue new equity, using the money to buy their own stock, thus pushing up per-share corporate earnings.

The end result? 2013 was a banner year for stocks on the key stock indices. But as 2014 came around, we began … Read More

Getting the Most for Your Risk-Adjusted Buck

By for Profit Confidential

Get the Most of Your Investment Capital in a Crumbling MarketTwo years ago, when the former Kraft Foods Inc. broke itself up, spinning off its global food and beverage business (now Kraft Foods Group, Inc. [KRFT]), the company renamed itself Mondelez International, Inc. (MDLZ). Now, the company is mostly a global snacks business. The new Kraft Foods Group has done pretty well on the stock market since listing in September 2012; the position currently has an attractive dividend yield of 3.7%.

Large-cap corporate spin-offs are typically highly profitable for shareholders. (See “Top Market Sectors for 2014.”) Despite a slow start, Mondelez has finally broken out of its recent consolidation trend on new operational momentum.

Mondelez sells cookies, snacks, confections, and cheese. Some of the company’s iconic brands include “Cadbury,” “Oreo,” “Nabisco,” “Christie,” and “Trident,” among others.

The Street’s been bidding “safer” stocks recently, and investors liked Mondelez’s news of a restructuring plan and the spin-off of its coffee business, which will net the company $5.0 billion in after-tax proceeds.

Like many large-cap public companies, Mondelez has been buying back its own shares. In the first quarter, it spent $500 million on its own stock at an average price of $34.20 per share. Its two-year stock chart is featured below:

Mondelez International Inc Chart

Chart courtesy of www.StockCharts.com

If you happened to be a shareholder of the former Kraft Foods Inc. then you’ve done well with both spin-off businesses and both stocks remain attractive holds.

Mondelez isn’t offering as much income as the new Kraft Foods Group; its dividend yield is currently around 1.6%. And while top-line growth is always an issue for established large-cap consumer brands, Mondelez is an improving earnings story—that’s … 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

Top Wealth-Creating Stocks Defying Stock Market Sell-Off?

By for Profit Confidential

What Stocks Are Defying the Near-Term Stock Market TrendWith the broader stock market selling off, it’s amazing to see a company’s share price defy the near-term trend and appreciate in value.

Time and time again, Johnson & Johnson (JNJ) gets bid when the broader market faces convulsion. It’s a powerful signal, and there is still a great deal of angst among institutional investors; they still want those dividends and the relative safety of earnings that are predictable.

Johnson & Johnson has been—and continues to be—an excellent wealth creator. The stock’s been bouncing off $95.00 a share the last while and just recently, it seems to have broken past this price ceiling.

There’s not a lot new with this position. One Wall Street firm recently boosted its earnings expectations for the company in 2015. Sales growth is expected to be in the low single-digits this year, but annual earnings growth combined with dividends should be in the low double-digits once again. The company reports its first-quarter numbers on April 15.

There’s definitely been a change in investor sentiment regarding speculative positions. Biotechnology stocks, which have been the market’s multiyear winning sector have finally seen investors book profits. It’s been long overdue and from a market perspective, is a healthy development for the primary trend.

The selling migrated to large-cap technology names and the shakedown just might last a while longer. Anything can happen during an earnings season, but a “sell in May and go away” type of scenario is a real possibility again this year.

Other blue chip names that are also defying the market’s recent action include 3M Company (MMM), Union Pacific Corporation (UNP), Kimberly-Clark Corporation (KMB), Microsoft … Read More

Markets Asking a Lot from Blue Chips; Can They Deliver?

By for Profit Confidential

Wall Street Earnings are beginning to roll in and quite a few companies are missing Wall Street consensus.

This doesn’t mean, however, that there isn’t growth out there; only that estimates have so far been a little optimistic.

CarMax, Inc. (KMX) is a well-known used-car dealer. The company’s latest numbers were decent, but they came in below what Wall Street was looking for.

Fiscal fourth-quarter sales grew nine percent to $3.08 billion, which is pretty good. Comparable store unit sales grew seven percent in the fourth quarter and 12% year-over-year.

The company had to correct some accounting procedures related to extended service plans and warranties, and it took a hit on earnings because of this.

CarMax is buying back its own stock and just authorized another $1.0-billion repurchase plan that expires at the end of the 2015 calendar year. The stock only dropped marginally on the news.

Another company that missed consensus but is very much a growing enterprise is AZZ Incorporated (AZZ) out of Fort Worth, Texas. We looked at this company last year. (See “Things Are Looking Up! Let’s Hope They Don’t Wreck It.”)

This is a good business. The company manufactures electrical equipment and components for power generation and transmission. Management recently said that business conditions are improving and new quoting activity is noticeably stronger.

Fiscal 2014 fourth-quarter revenues came in at $180 million, compared to $140 million in the fourth quarter of 2013. Earnings were $10.2 million, or $0.40 per diluted share, compared to earnings of $13.2 million, or $0.52 per diluted share.

While the company actually missed Wall Street consensus earnings by $0.02 a share … Read More

Significant Divergence Between Copper Prices and Stock Market Not to Be Ignored

By for Profit Confidential

Two Leading Indicators Warn of a Stock Market TopIn the midst of all the optimism we see towards key stock indices these days, there are two leading indicators that are flashing warning signals. They say, “Be careful, and don’t get caught up in the euphoria.”

Let’s start with the amount of money investors are borrowing to buy stocks…

Margin debt, the amount of money borrowed to purchase stocks, is one of the leading indicators of where key stock market indices will go. Historically, the higher margin debt gets, the more risk for key stock indices. This indicator predicted the top of the stock market in 2007 and the Tech Boom top of 2000.

As it stands, margin debt on the New York Stock Exchange (NYSE) is at its highest point ever recorded—$451 billion. (Source: New York Stock Exchange web site, last accessed March 25, 2014.) Sadly, this fact continues to be ignored by stock advisors. Yes, investors have borrowed almost half a trillion dollars to buy NYSE-listed stocks!

Another key indicator that suggests key stock indices are stretched is copper prices.

Since the beginning of the year, copper prices have plunged lower. What’s interesting about this is that copper prices usually top before the key stock market indices do; they usually bottom before stocks as well. In the chart below, I have plotted copper prices (black line) over the S&P 500 and circled areas where copper has acted as a leading indicator of key stock indices.

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

Copper prices topped in 2007 before key stock indices did. Then in 2009, they bottomed out well before the S&P 500, about three months earlier. Then in 2011, … Read More

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