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

Posts Tagged ‘market sentiment’

Bearish Bank Stock Analyst Turns Bullish; Should You Follow?

By for Profit Confidential

Bearish Bank Stock Analyst Turns BullishEver since the financial crisis several years ago, market sentiment has been quite negative on bank stocks. While the initial pessimism was well warranted, bank stocks today are radically different than they were in 2008. Clearly, from the massive gains in the share price of most, if not all, bank stocks, the market sentiment has shifted dramatically. The question: is the bull market over for bank stocks?

One of the most critical analysts against bank stocks has been Meredith Whitney. However, on December 18 in an interview with CNBC, following her extensive research, she has now become bullish on bank stocks.

As she stated in the interview on CNBC, “There’s an incredible growth opportunity within the financials… I think the underlying support is housing is close to bottom, so that is a great headwind relief for banks… They’ve come a long way.” (Source: CNBC, December 18, 2012.)

One of her main calls is for the bull market in Bank of America Corporation (NYSE/BAC) to continue, as she believes the Federal Reserve will approve their dividend increase request. Whitney believes Bank of America could quadruple its dividend.

It is expected that the Federal Reserve will release the results of stress tests on the bank stocks in January. In March, it will state whether or not increases in dividends and share buybacks can resume. Considering how much the bank stocks have changed over the years in terms of improving their balance sheets, I do not expect there to be any problems for most of the bank stocks. Market sentiment might still be underweighting this sector ahead of these key releases.

Of course, … Read More

Don’t Trade Apple Until You Read This

By for Profit Confidential

Trade AppleNo one can deny that Apple Inc. (NASDAQ/AAPL) has had an extraordinary run. Both the company itself and the stock have been the clear leaders among technology stocks. This has led to the current market sentiment, which is overtly bullish. This can be dangerous for investors, when market sentiment is leaning so much in one direction—either bullish or bearish. This could be a problem if, at some point, everyone who wants to own the stock already does; then there’s no one left to buy it. While many technology stocks are starting to underperform, Apple has continued its strength.

The question: is market sentiment shifting? The stock’s move up from the summer until the peak in September was on expectations for the new “iPhone 5.” Many investors try to jump ahead of product announcements from technology stocks, hoping to profit from the upcoming publicity. This does appear to be a good trading strategy, as many times technology stocks subsequently pull back once the announcement takes place. This is an old phenomenon called “buying on the rumor, selling on the fact.”

One must be aware that, for Apple, a huge part of its corporate earnings come from the iPhone. While it does have a suite of products it sells, a disproportionately large amount of profit stems from one product. Technology stocks are certainly not sitting back and allowing Apple to dominate; they’re fighting to regain market share. Obviously, Apple has a significant lead, but it appears the competition has stepped up their game.

While other technology stocks have had to play catch-up with Apple’s innovative products, this iPhone represents the reverse. … Read More

JPMorgan Set to Continue Higher in Spite of Frivolous Lawsuit

By for Profit Confidential

JPMorgan Set to Continue Higher in Spite of Frivolous LawsuitWhen it comes to bank stocks, it seems that JPMorgan Chase & Co. (NYSE/JPM) is Public Enemy Number One. It’s unfortunate that so many retail investors have such a negative market sentiment towards JPMorgan since it has the potential for large returns, with a dividend yield of 2.9%.

The latest cheap shot is nothing short of a publicity stunt by a future politician, as the office of New York Attorney General Eric Schneiderman has just filed a civil lawsuit against a unit of JPMorgan, The Bear Stearns Companies, Inc., for alleged fraud.

Of course, I don’t condone fraud; in fact, I think the penalties we have are far too lax when it comes to all companies, not just bank stocks. The problem is that this is clearly not about what’s in the best interest of America, but rather the need for a high-profile case to catch the public attention for the Attorney General to move up the rungs of the political ladder.

When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”

Now that the political tide on bank stocks has shifted with market sentiment, the bull’s-eye is on the back of JPMorgan, among other bank stocks. Obviously, this is a lesson: if you … Read More

Is the Stock Market Where It Should Be After QE3?

By for Profit Confidential

business arrow diagramOn a lot of occasions, the stock market sells off on the reality of its expectations, but it hasn’t since the Federal Reserve announced a third round of quantitative easing (QE3). The main stock market indices are holding up very well, consolidating more so than selling off on the news. Stock market sentiment continues to be relatively positive, with some hope for the economic future and the expectation that third-quarter earnings season won’t be terrible.

There’s still a lot to be said for the stock market’s reasonable valuation, given the earnings picture. With fairly priced stocks, a lot of which are trading close to their 52-week or all-time highs, there’s always room for a little more expansion in price and less contraction on the downside. A stock market that isn’t expensively priced gives the marketplace a lot more leeway for changes.

Some benchmark stocks that I follow on a continual basis are holding up extremely well, leading me to expect further upside ahead until we get into the heart of third-quarter earnings season. Union Pacific Corporation (NYSE/UNP) is an important component of the Dow Jones Transportation Index, and this stock is trading right at its all-time high, still with a current dividend yield of 1.9%. (See “The Top Stocks Making Money in This Market Right Now.”)

Take a look at Union Pacific’s stock chart:

Union Pacific Corp NYSC + BATS Stock Chart

Chart courtesy of www.StockCharts.com

On the comeback trail is industry benchmark General Electric Company (NYSE/GE), which was hit very hard during the financial crisis in 2008/2009. The stock is about halfway through its recovery to its pre-financial crisis level, lagging most of the stock … Read More

Further Signs of Trouble for Zynga

By for Profit Confidential

Trouble for ZyngaThere are few technology stocks that have encountered sharp decline in market sentiment quicker than Zynga Inc. (NASDAQ/ZNGA). Technology stocks in the social media space have had a bumpy ride lately. Market sentiment continues to plummet, as the initial rush into this sector by early investors now appears quite foolish.

The market sentiment is obviously all over the place in these technology stocks. But, for those thinking they’re cheap, I’d say be careful of trying to catch a falling knife. I’ve repeatedly made this warning for many stocks in the past, including Zynga and Groupon, Inc. (NASDAQ/GRPN).

Just recently we learned that Jeff Karp, chief marketing and revenue officer for Zynga, has resigned. This makes the number of senior-level executives who have recently left the company more than half a dozen. This type of mass exodus from the senior management level of any of the technology stocks should worry investors. Obviously, with Zynga near its lows of the year, market sentiment is correct to be negative on the company.

With the decline of over 70% this year alone, Zynga appears to be one of the worst technology stocks in recent memory. As I previously stated, with so many questions about the way management ran the company, market sentiment should have been cautious from the beginning.

Technology stocks that encounter this kind of situation ultimately end up having extremely low morale amongst any of the employees who stayed. This essentially means that the best and brightest leave to better companies, while those who stay with the company try to stop the bleeding. Frankly, I think market sentiment should and will remain … Read More

Is Facebook a Buy?

By for Profit Confidential

Is Facebook a Buy?An embarrassing turn of events continues to unfold after the recent initial public offering (IPO) of Facebook Inc. (NASDAQ/FB). Talk about a roller coaster of market sentiment changes. Prior to the IPO, it seemed as if everyone wanted a piece of one of the hottest technology stocks in recent memory. Yes, Facebook’s user growth has been tremendous over the past few years, but questions are arising about everything related to the company, including questions from its underwriter Morgan Stanley (NYSE/MS).

When technology stocks go public, the underwriter will try to sell one basic idea to investors: the stock’s future growth is huge. Market sentiment was built up to a frenzy; yet it appears that the environment for technology stocks in this social media space is changing at a rapid pace, faster than Morgan Stanley expected. Morgan Stanley lowered its price forecast for Facebook, just a few months after its IPO. This is quite a surprise, not just for technology stocks, but for any company. The lead underwriter should know everything there is to know about the company. For changes to occur so soon after an IPO, it certainly causes some eyebrows to be raised.

Market sentiment has, of course, drastically shifted from overly bullish to quite negative, with shares near the year’s lows. With a high of $45.00 and a low of $17.55, this extreme shift in market sentiment cannot give investors much assurance as to the type of investors involved in this stock. Yes, many investors in technology stocks are shorter term and, thus, cause increased levels of volatility. But if the underlying strength of the company is that … Read More

Is Apple a Buy Right Now?

By for Profit Confidential

Is Apple a Buy Right Now?The recent ruling in the patent lawsuit in favor of Apple Inc. (NASDAQ/AAPL) against Samsung Electronics Co. Ltd. (KRX/005930) is seen by some as a big blow to Samsung. Many looking at technology stocks are looking at jumping aboard Apple simply because of this victory; I would say that’s a mistake. Technology stocks in this sector are constantly evolving and innovating, and market sentiment will also shift among the stocks; Apple’s victory will be short-lived. One has to be careful not to jump into technology stocks for the wrong reasons or as soon as market sentiment begins to shift.

First off, let’s not overthink the situation. Apple is a clear beneficiary among the technology stocks in the mobile phone sector. Market sentiment is, of course, extremely bullish of Apple, which makes entering a new position at these lofty levels quite dangerous. Market sentiment will continue to remain positive, but I would wait for a pullback and a more attractive entry option in Apple. The Relative Strength Index (RSI) is near its highs, and that has traditionally meant that market sentiment is close to peaking over the short term.

Samsung is not traded in North America, but among technology stocks, it is clearly building a huge amount of momentum. It will appeal the ruling, no doubt, but even if it is not successful, I think the market sentiment is far overdone in this case. This patent case was for older handsets of Samsung. It does not include the best-selling “Galaxy SIII.” Older models have seen a huge fall-off in sales anyway, so the real hit is far less than market sentiment … Read More

Housing Market Terrible? Not According to This Stock

By for Profit Confidential

Housing Market Terrible? Not According to This StockWhile there are still many pockets of weakness in the housing market, there are now some positives beginning to emerge. Market sentiment for the broad U.S. housing market will most likely stay muted, due to the millions of homes left to be foreclosed. However, the housing market is not one uniform sector, but is based on location. In certain areas, the market sentiment for the housing market has become quite positive.

One company that is benefiting tremendously from the resurgence in the housing market is Toll Brothers, Inc. (NYSE/TOL). The company recently reported quarterly earnings that were the highest since 2008.

The firm is smart in how it handles the housing market. It focuses on only the housing market segments that have high levels of demand. With a clientele that is of higher income, there isn’t concern over financing issues. Toll Brothers CEO Douglas C. Yearley Jr. stated that the company is currently seeing the most sustained demand than in any other time since 2008.

The company reported contracts signed were up 57.0% from a year-ago period and the backlog of orders now sits at $1.6 billion, up 59.0%. The company reported $61.6 million in net income, as compared to $42.1 million in the year-ago period. Revenue increased to $554 million, up 41.0% from the year-ago period.

The company CEO also noted that in many parts of the country, the housing market has a shortage of inventory, allowing for the average price at which the firm can sell homes to increase 3.4% from the second quarter.

Toll Brothers, Inc. Chart

Chart courtesy of www.StockCharts.com.

As strong as these returns were, I’d be very … Read More

Are Oil Prices Telling Us to Expect an Israeli Strike on Iran?

By for Profit Confidential

Oil PricesWith the recent string of weak economic data worldwide, one would think that the market sentiment for oil prices would be negative. Even the International Energy Agency (IEA) is expecting lower demand for oil next year due to weaker worldwide economic growth. So why are oil prices moving up, and is this market sentiment here to stay?

As with many areas of investing, the market sentiment for oil prices is very complex. End-user demand is obviously very important. Over the last decade, we’ve seen the massive growth of emerging nations like China. The country’s increased use of oil has increased global demand with the end result that oil prices have moved up sharply. This market sentiment is now being thwarted with a slowdown in the Chinese economy. This can be best seen by the fact that China is importing oil at the lowest level in nine months, yet oil prices still remain elevated.

Oil is one of the commodities most sensitive to geopolitical events in the Middle East. Following last weekend, Israeli Prime Minister Benjamin Netanyahu stated, once again, that the biggest threat to Israel is Iran developing nuclear weapons. Recent reports that Iran is increasing its nuclear armament progress have increased investors’ market sentiment towards oil prices once again. With worries about a potential war, oil prices have once again started moving up, as the market sentiment is getting scared of not being caught short in this commodity.

Will Israel launch an attack on Iran’s nuclear facilities? No one can know that answer except the Israeli leaders, but we can see from the chart of oil prices that investors … Read More

Trading Strategy for the S&P 500

By for Profit Confidential

Trading Strategy for the S&P 500With all of the negative market sentiment in the markets and in the newspapers every day, one index that has bucked the trend is the S&P 500. The S&P 500 has been an extremely strong performer so far this year. In the face of a slowdown in China, Europe continuing to implode, and a general market sentiment that isn’t resoundingly bullish, the S&P 500 has continued to move higher.

Is the market insane or does it know something the general public doesn’t? It is true that the economic data has been quite poor over the last few months. The U.S. is certainly experiencing a slower level of gross domestic product (GDP) growth as compared to the earlier part of 2012. Market sentiment has remained poor with many short-sellers quite active, betting against the S&P 500. What happens for short-sellers is that, at some point, they end up being forced to cover. I believe part of the rise can be attributed to short-sellers covering in the face of a strong S&P 500.

Another partial reason is that many investors are anticipating additional monetary stimulus by the central banks of the world, including the Federal Reserve. Will market sentiment change if the Federal Reserve does not add more stimuli? That’s a difficult question to answer. Obviously, no one can predict how the market sentiment will change and how the S&P 500 will be impacted by this dynamic shift in the psychology of the market. What we can do is look at the technical analysis of the S&P 500 to understand the current market sentiment.

S&P Large Cap Index Chart

Chart courtesy of www.StockCharts.com.

The S&P 500 … Read More

The Danger in Technology Stocks

By for Profit Confidential

Technology StocksTechnology stocks have had a bumpy ride lately, but none more so than some of the new initial public offerings (IPOs). Some of these technology stocks have had a huge 52 week range, such as Groupon, Inc. (NASDAQ/GRPN) with its range of $31.14-$9.63. Zynga Inc. (NASDAQ/ZNGA) and now Facebook, Inc. (NASDAQ/FB) are other technology stocks that have gotten killed once they went public. The market sentiment is obviously all over the place in these technology stocks. But, for those thinking they’re cheap, I’d say be careful of trying to catch a falling knife.

I already advised my readers not to invest in Groupon when it was trading much higher, in the article, The Danger with Investing in Groupon. The main points of my article then also apply to other technology stocks right now; including making sure that the company has an entrenched competitive advantage to prevent competitors from stealing its customers. For Groupon, there are no barriers to entry and no loyalty from customers. Other technology stocks with this problem include Zynga, maker of video games like “FarmVille” on Facebook. While some video games do have some loyalty, I think it’s highly likely that 10 years from now people will be bored with buying virtual animals and have moved to other games. So, now, an investor is betting that Zynga can come up with blockbuster games year after year, a hard task for any technology stocks.

We then move on from low barriers of entry and fickle consumers to the market sentiment of technology stocks and the valuation placed on them. Facebook is the prime example of smart money … Read More

My Technical Opinion on a Very Widely Held Stock

By for Profit Confidential

corporate profitsThe recent sale of Edvard Munch’s “The Scream” for almost $120 million is a clear indication of the market sentiment regarding hard assets. The sale took place at Sotheby’s Holding, Inc. (NYSE/BID) auction house, one of a few firms whose investment strategy is to auction off high-end art and antiquities.

This sale was the highest priced auction sale in history, showing that the market sentiment for rare assets is still very high. The reason why the price went so high is that the collector assigned the value of the art as far more than paper money. When market sentiment gets to the point where the actual paper money is worth less than hard assets, this is a warning sign to everyone.

Yes, this art is only for the super-rich, but if they’re willing to trade a paper money for a painting, this tells me that paper money is becoming more worthless every day. The market sentiment of the super-rich is not to be ignored. If their market sentiment indicates that money printing is causing the devaluation of the dollar, then I would suggest following in their steps and protecting your assets.

While we can’t all participate in the high-end art market, regardless of our market sentiment towards paper money, one way is to look for firms the corporate profits of which will benefit from this market sentiment. The sale took place at Sotheby’s auction house, the main publicly traded firm available for investors who believe that the market sentiment of hard asset values will continue to go up. On Thursday, May 10, 2012, the firm will announce quarterly corporate profits. … Read More

Pentagon Warning Might be Devastating to These Stocks

By for Profit Confidential

market sentimentWith the election looming over the economy, more industries are being tormented by inaction and political bickering. The market sentiment is becoming increasingly frustrated due to the lack of a stable regulatory environment. This instability makes it very difficult to determine a long-term investment strategy. After all, how can you forecast corporate earnings if you don’t know what the politicians will do in a few months?

One sector that is warning of huge problems and a hit to corporate earnings is the military. While I wrote about this topic briefly over a month ago in the article Deep Budget Cuts to Hurt this Sector, we just heard from the Pentagon itself that, unless the politicians can strike a deal to reduce the budget deficit, the automatic cuts are going to be very deep and firms need to start preparing for hits to their corporate earnings as a real possibility.

Corporate earnings of firms that supply military equipment are at the mercy of politicians and that can keep someone awake at night. To define an investment strategy based on the number of votes this fall is extremely difficult. This is one reason that leaders of defense firms are speaking up and making politicians aware that the job cuts and plant closures will be very severe.

Before we even get to the budget cuts, many companies are worried that the Pentagon is withholding the making of any new decisions and purchases ahead of this event. This will certainly hurt corporate earnings on the margin, especially for small firms whose primary customer is the Pentagon. Inaction and a lack of visibility … Read More

Caterpillar’s Cracks Indicate an Economic Slowdown

By for Profit Confidential

Economic SlowdownThere is no doubt that Caterpillar Inc. (NYSE/CAT) has had a tremendous run since the fall. From a low of $67.54 in October to a recent high just over $116.00, the market sentiment has turned completely around. There are very few big firms that are capable of such a shift in market sentiment, which makes predicting markets that much more difficult.

Some research indicates to me that perhaps the stock is priced to perfection at current levels. Once market sentiment goes too far, either pessimistic or optimistic, this is when an investor can generate profits. Market sentiment always swings back and forth on a pendulum. The key is to wait patiently for the right time.

With quarterly earnings due out for Caterpillar on April 25, we can take a look at some possible scenarios and what the recent information may mean for the market overall. When predicting markets, try to gauge the underlying business model of the company and then see how that stacks up with the market sentiment. If there are signs that the business might be slowing down, but market sentiment is too positive, this is the time to be cautious and either take profits or hedge your position.

Caterpillar Chart

Chart courtesy of www.StockCharts.com

Research into Caterpillar’s statistics of dealer sales is showing a disturbing trend. Using a three-month rolling average on a year-over-year basis, the number of sales is decreasing, yet it’s still positive. Worldwide, last June, the sales rate was up 45% year-on-year, decreasing almost every month until February when it was at 21%. While that’s still great, stock prices are relative and represent market sentiment. … Read More

Chart Resistance Tough to Crack;
My Technical Analysis

By for Profit Confidential

technical analysisWhile January was one of the best months for stocks, the upward advance has been stalling, which shouldn’t be a surprise given the rapid move and the reality that the rate of gains cannot be maintained without periodic market adjustments. My technical analysis is that stocks in an uptrend go through periods of ups and downs, which is normal and healthy as long as the subsequent highs and lows are higher on each upward wave. You also need buying conviction on the buy side, which helps to provide the underlying strength.

Small-cap stocks have been impacted the most in the recent weeks, as the Russell 2000 has lost some steam after a strong start to the year and broke below its key 50-day moving average (MA) of 791 on Tuesday, before a slight bounce back above it. My technical analysis shows near-term topping above 800 and a subsequent decline to below its 20-day and 50-day MAs. The index is precariously sitting at the 50-day MA, and failing to hold could see a drop to 750.

small-cap stocks

Chart courtesy of www.StockCharts.com

The chart resistance has been tough to break based on my technical analysis. The Dow Jones Industrial Average (DJIA) failed to hold at 13,000 after several breaks, and is below its 20-day MA, but holding above its 50-day MA. The chart shows the overextension and the need for a market adjustment, which we may be seeing based on my technical analysis.

Dow Jones Industrial Average

Chart courtesy of www.StockCharts.com

But what makes me nervous is the failure of the Dow Jones Transportation Index to follow the DJIA higher, as demonstrated on the chart; it’s a … Read More

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