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

Posts Tagged ‘investor sentiment’

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

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

Increasing Stock Buybacks a Signal to Cash Out?

By for Profit Confidential

What the Increase in Share Buybacks Means for InvestorsStocks are churning without any notable trend, influenced by geopolitical events, the lack of corporate reporting, and a recent change in investor sentiment regarding valuations. The fact is that a lot of stocks are ahead of themselves, and this is why we may very well get a lot of profit-taking over the next couple of months.

Aside from monetary policy, the most valuable information in the marketplace is what corporations report about their business. While the calendar first quarter will soon be over, a number of companies are now reporting their numbers.

Sonic Corp. (SONC) operates the largest chain of drive-in restaurants and the company’s results for its fiscal second quarter (ended February 28, 2014) weren’t that bad.

Same-store sales for the company grew 1.4%, but total revenues dropped slightly to $109.7 million, down from $111.1 million in the same quarter of last year.

Earnings were $4.1 million, or $0.07 per diluted share, compared to $3.6 million, or $0.06 per diluted share.

In a trend that’s so prevalent these days, the company repurchased $51.0 million of its own shares during the most recent fiscal quarter at an average price of $19.14 per share. This represents approximately five percent of the company’s total shares outstanding. Since the beginning of fiscal 2012, the company has bought back $125 million of its own stock, or 17% of total shares outstanding.

Management anticipates earnings will grow 14% to 15% this fiscal year (compared to adjusted non-GAAP earnings). They also expect to buy back another $80.0 million of the company’s shares this fiscal year. Sonic’s five-year stock chart is featured below:

Sonic Corp ChartChart courtesy of 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

What These Two Large-Cap Techs Are Saying About the Upcoming Quarter

By for Profit Confidential

What These Two Companies Signal for Tech Stocks This QuarterYou know another earnings season is right around the corner because Oracle Corporation (ORCL) and Adobe Systems Incorporated (ADBE) always report their fiscal results just ahead of the calendar quarter end.

Both technology stocks are bellwethers, and while they are mature enterprises, they do help set the tone in sentiment. It’s exactly what the marketplace needs now so investors can have something else to worry about over geopolitical events.

Oracle’s been going through its own issues trying to generate top-line growth. Revenue and earnings the last several quarters have been very modest.

And so have Adobe’s numbers, but Wall Street analysts have been boosting their earnings estimates for the company in 2015 and the stock has doubled over the last 18 months.

Oracle is definitely more of a value play, and the company pays a dividend. Adobe is expensively priced and while much smaller, still boasts a stock market capitalization of approximately $34.0 billion.

In previous quarters, it was pretty obvious what the Street was looking for in terms of earnings results. At the beginning of 2013, investors just wanted to know that corporate earnings would hold up. Then they were happy with modest growth so long as dividends were increased.

This quarter, there doesn’t seem to be a financial metric that the market is looking for just yet. The choppy trading action is a reflection of all the uncertainty in the world, but also a market that hasn’t experienced a material price correction since 2008/2009, which is a long time to go.

As much as a broad stock market correction would be a healthy development for the long-run trend, … 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

This Blue Chip Keeps Bouncing Back

By for Profit Confidential

This One Stock Keeps Bouncing BackAmong blue chips, Johnson & Johnson (JNJ) remains one of the most attractive enterprises for long-term investors.

As a benchmark stock within the entire equity universe and a conglomerate itself of healthcare businesses, it’s reasonable to expect a stock like this to provide a normalized annual return of approximately 10% including dividends.

Johnson & Johnson isn’t typically down for long on the stock market, and most recently, the stock popped higher after dropping to $86.00 a share.

The position’s been toying with $95.00 a share, and this is a ceiling for the stock, according to its recent trading action over the last couple of quarters. If the broader market holds firm, $100.00 a share by year-end would be a fair and attainable price target.

While not robust, earnings have caught up to share prices for many blue chips and countless positions are not overpriced.

Johnson & Johnson has a trailing price-to-earnings (P/E) ratio of approximately 19.5 and a forward P/E ratio of around 15. Because of the company’s stellar long-term returns to shareholders, it’s kind of like a golden blue chip, as very few companies have been able to produce such decent and consistent operational growth in their businesses.

Johnson & Johnson’s long-term, split-adjusted stock chart is featured below:

JNJ Johnson & Johnson NYSE Chart

Chart courtesy of www.StockCharts.com

All blue chips, even those with increasing dividends, experience periods of non-performance, but often to a lesser degree than the broader market. While not offering robust growth, the stability of an enterprise like this company provides peace of mind, in addition to the high likelihood that dividends will increase in the future and that demand for … Read More

Former Momentum Stocks Signpost to Sell?

By for Profit Confidential

Price Momentum Suggests Portfolio RebalancingA good amount of speculative fervor has come out of this market so far this year, but there’s still quite a bit of valuation froth around.

Across the board, 3D-printer stocks have come back. 3D Systems Corporation (DDD) still boasts a trailing price-to-earnings (P/E) ratio of around 150.

Tesla Motors, Inc. (TSLA) is still going strong. It’s one of few super-hyped stocks that made a strong recovery in January after a material sell-off months before. (See “Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?”) The position just bounced off $265.00 per share. Next year, Wall Street estimates the company will do more than $5.0 billion in sales.

Looking at the stock market currently, there’s a lot of indecisiveness and geopolitical events are overshadowing the action.

Watch large-cap biotechnology stocks (or the NASDAQ Biotechnology Index) for their trading action specifically. This group of stocks reaccelerated strongly in February and is very much overdue for a material correction.

I’ve noticed several key momentum stocks within the group have started rolling over. This should be a strong contributing indicator to the short-term action unrelated to specific events happening in Ukraine.

Gold is holding up well with the geopolitical tensions, and oil prices are too, but to a lesser degree.

Stocks are due for a break. What looked like the makings of a material correction in January, equities reversed direction after the Federal Reserve, once again, reiterated its willingness to be highly accommodative to capital markets.

This kind of market (after such a strong 2013 for stocks) warrants a significant degree of caution. I wouldn’t be jumping onto any bandwagons. … 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

Strong Balance Sheets, Fed Liquidity; What’s Not to Love About This Stock Market?

By for Profit Confidential

Things Looking Rosy for the Stock MarketThere is a lot of liquidity out there, and all kinds of stocks are experiencing significant price momentum.

It’s a bull market still, and no matter how long it has to run, it seems that valuations aren’t as important as owning the right stocks for institutional investors. Countless names have fought back in price from recent sell-offs and are now pushing new record-highs once again.

These stocks include Netflix, Inc. (NFLX), priceline.com Incorporated (PCLN), and Google Inc. (GOOG), among others. You could buy a basket of these stocks and if nothing were to change in terms of monetary policy, they probably would be higher in a month’s time.

But while momentum remains strong and existing winners keep outperforming, stocks haven’t really experienced a material price correction in more than two years and because of this, investment risk remains high.

Previously in these pages, we looked at some top-ranked biotechnology stocks that continue to be tremendous wealth creators for shareholders. (See “Can the Rally in Biotechs Keep Its Momentum?”) But their amazing price-performance also illustrates the froth in the stock market. While speculative fervor for initial public offerings (IPOs) has diminished since the beginning of the year, existing winners just keep on plowing higher.

Investor sentiment can always change on a dime, but it needs a catalyst to do so. This could include a change in monetary or fiscal policies, a geopolitical event, a derivatives trade gone bad, currency destabilization—the list is endless.

The Federal Reserve recently gave the marketplace the certainty it was looking for: quantitative easing is going to continue to be reduced and short-term interest rates … 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

Simple Daily Task Could Yield More Profitable Trades

By for Profit Confidential

Could One Simple Daily Task Really Boost Your Profits Enough to NoticePlaying turnaround situations is a tough thing to do in the stock market. If a company’s share price experienced a material price retrenchment, it’s usually done so for a very good reason. Penny stocks are that way not because they want to be.

It’s useful scanning the market for 52-week lows and 52-week highs; the process of doing so helps in the generation of lists of stocks for further research.

One company that just experienced a major price reversal on the stock market is Strayer Education, Inc. (STRA). This company provides postsecondary education and degrees online and on campus, and offers executive Master of Business Administration degrees in collaboration with the Jack Welch Management Institute.

The company’s share price bounced off a 52-week low, soaring approximately $13.00 a share to just over $47.00 after announcing 2013 fourth-quarter earnings that substantially beat the Street. Strayer Education’s one-year stock chart is featured below:

Strayer Education ChartChart courtesy of www.StockCharts.com

Big price moves like this on the back of much higher-than-average trading volume are worthy of further examination as a potential turnaround trade. A stock market speculator could have bet on the company’s earnings results, but this would’ve been total guesswork and an enormous risk. A better bet might be one directly related to the price reversal’s continued momentum on a near-term basis.

Strayer Education said that its fourth-quarter revenues fell 13% to $124.1 million compared to $141.9 million for the same period in 2012. The company experienced higher revenues per student but lower enrollment.

2014 winter term student enrollment dropped 14% to 41,098 students and company management implemented a restructuring of campus operations, … Read More

Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?

By for Profit Confidential

Momentum on Your Side in Buoyant MarketsTesla Motors, Inc. (TSLA) has been an excellent trade. The position has recovered strongly and is a very good example for traders who speculate on changes in investor sentiment.

Trading a stock like Tesla is about price momentum as much as anything. And every business, no matter how successful or fast-growing, experiences operational difficulty. This creates opportunity for a trader who is comfortable going against the market.

Tesla ran into problems with its “Model S” and was required to do a recall to help prevent battery fires after an accident. It was a short-lived but perfect storm in investor sentiment, which created an attractive new entry point for traders. (See “The Stock Everyone Is Talking About; How Much Higher Can It Go?”) The company’s stock chart is featured below:

 Tesla Motors INc ChartChart courtesy of www.StockCharts.com

While many investors/traders are attracted to low-priced or penny stocks for their turnaround potential, these stocks are usually down for a reason. In buoyant, highly liquid capital markets like we have today, a buy-high/sell-higher type of strategy can pay off.

The risk is that the price momentum ends, whether it is due to a material corporate event or a general decline in speculative fervor. Biotechnology stocks as a specific stock market sector are particularly prone to strong price momentum because of the strong participation from institutional traders.

Tesla is now a $24.0-billion company. The position didn’t do that much after listing, then it just exploded with extremely strong price momentum on much higher-than-average volume.

As a research strategy, scanning the stock market for new highs can yield some very good trades and/or stocks worth following … Read More

The Last Group of Burgeoning Stocks

By for Profit Confidential

The Income Stocks Investors Now CraveQuite a bit of speculative fervor has been zapped out of this market, which is helpful for the longer-run trend.

With the exception of biotechnology stocks, trading action has softened in initial public offerings (IPOs), 3D (three-dimensional) printer stocks, cloud software stocks, and even a lot of restaurant stocks that only recently were very hot.

The stock market is just a continuing cycle of fluctuating investor sentiment. Valuations among junior energy producers got really excessive last year and the entire group now seems to be in consolidation.

Gold and silver stocks appear to have been toast for a while. As is always the case in resource investing, even the best growth stories can’t generally get their share prices moving if the underlying commodity price is stagnant. Precious metals stocks have always traded in manias, and this is not likely to change.

In a slow-growth environment, dividend income is key. And after an exceptional year like 2013, it may just be the only rate of return to be had.

But like so many large-cap stocks last year, some of the best dividend payers have already gone up tremendously. There isn’t a lot of value for an equity buyer these days.

One specific sector that continues to be relatively hot is the master limited partnerships (MLP) of energy companies. There is very good yield to be had from this sector in addition to the potential for capital gains. There have been countless new listings of these securities, and the North American production boom is the reason.

One firm that illustrates the combination of capital gains and income that can be found … Read More

Stocks: Why I’m Starting to Favor the Second Half of 2014

By for Profit Confidential

Certainty from the Fed Could Support Further Capital Gains in 2014The single greatest certainty capital markets are looking for is policy stability from the Federal Reserve, and Janet Yellen, the new Chair of the Federal Reserve, delivered the goods for Wall Street.

With certainty in regards to short-term interest rates and the expectation that quantitative easing will continue to be reduced over the coming quarters, the fundamental backdrop for the stock market remains positive.

Many companies sold off after reporting earnings results that basically met consensus. This was well-deserved, especially in a market that has not experienced a meaningful correction for a number of quarters.

Particularly for large-caps, corporate earnings results in the last quarter of 2013 were decent and corporate outlooks for 2014 were also relatively positive, considering the current state of things.

Add in the high likelihood of rising dividends from blue chips in the bottom half of the year, and you have the makings of another decent year for stocks.

Corporate balance sheets are in top-notch condition, and the cost of capital is cheap. From the corporate perspective, this is the perfect backdrop for greater growth, and sales growth translates to the bottom line.

For the last couple of quarters, I’ve been reticent about investors buying this stock market. Long investors benefitted tremendously in 2013, even by owning blue chips. While the expectation has been for a major stock market correction (or collapse), one has yet to transpire. Instead, we are getting meaningful price consolidation, which is happening again.

The lack of a meaningful double-digit price correction in the stock market illustrates the continued underlying fervor that institutional investors have to be buyers. With continued certainty from … Read More

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