How Are Stocks Doing?

by George Leong, B. Comm.

The past week could be described as jumpy, as investors were on edge and were not clear of wanting to bid the markets higher. As we move deeper into the fourth-quarter earnings period, so far it has been mixed and the guidance has been fuzzy, based on the global economic woes.

The banking group has been reporting some strong quarterly results, but do not forget the significant load of toxic assets on the balance sheets. Credit Suisse Group AG (NYSE/CG) reported a strong quarter. On the down, Morgan Stanley (NYSE/MS) reported a weak quarter. The toxic assets on the balance sheet of the banks need to be dealt with before there is any confidence in stability of the banking system. A huge loan loss provision by the Bank of America Corporation (NYSE/BAC) suggests that the situation could worsen.

We also saw some strong results in the technology sector, which has led the markets this year. “iPod” maker Apple Inc. (NASDAQ/AAPL) reported a strong quarter. eBay Inc. (NASDAQ/EBAY) also reported a strong quarter. The results should give the technology some renewed optimism after the recent fuzzy guidance from Intel Corporation (NASDAQ/INTC).

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The first-quarter earnings and guidance will help drive trading over the next month. Despite the six-week rally, there are still some concerns regarding whether this is simply a bear market rally and if the recovery will be “W” shape and not “V” shape, as I have discussed in previous commentary.

The question is: when will the second leg-up surface? Based on the current data, it could precede the economic recovery and may not happen until later this year or in 2009. Goldman Sachs predicts that the U.S. economy will expand by about 1.9% in 2009 and over 2.0% in 2010. While this indicates expansion, the numbers are not that impressive. The U.S. economy could lag for several years in the worst-case scenario.

Markets remain at a crux and need to break higher, or we could see sideways trading in the immediate future.

The key is not to chase gains higher. There are more buying or trading opportunities surfacing, especially after stocks sell off. When stocks sell off over 50%, this is overdone and there could be an opportunity for a quick gain. As a trader, what you want to do is to watch the screens and pinpoint any stocks that sell off. Check the underlying fundamentals and, if they are intact, you may want to enter into a position. However, you should begin the trade with a small portion so as not to risk too much capital. Have stops in place and buy additional positions if the trade looks good.

Be careful with stocks; given the intraday volatility, setting stops that are too small could see your position closed out quickly on a swing. I have seen this occur on many occasions. On the more speculative and high-trade stocks, the swings can be over 20% over a few days. So, in these cases, you may want to risk a bit more, but, ultimately the key is to trade smaller positions and not to bet the farm, so to speak.

How Are Stocks Doing?
by George Leong, B. Comm.

The past week could be described as jumpy, as investors were on edge and were not clear of wanting to bid the markets higher. As we move deeper into the fourth-quarter earnings period, so far it has been mixed and the guidance has been fuzzy, based on the global economic woes.

The banking group has been reporting some strong quarterly results, but do not forget the significant load of toxic assets on the balance sheets. Credit Suisse Group AG (NYSE/CG) reported a strong quarter. On the down, Morgan Stanley (NYSE/MS) reported a weak quarter. The toxic assets on the balance sheet of the banks need to be dealt with before there is any confidence in stability of the banking system. A huge loan loss provision by the Bank of America Corporation (NYSE/BAC) suggests that the situation could worsen.

We also saw some strong results in the technology sector, which has led the markets this year. “iPod” maker Apple Inc. (NASDAQ/AAPL) reported a strong quarter. eBay Inc. (NASDAQ/EBAY) also reported a strong quarter. The results should give the technology some renewed optimism after the recent fuzzy guidance from Intel Corporation (NASDAQ/INTC).

The first-quarter earnings and guidance will help drive trading over the next month. Despite the six-week rally, there are still some concerns regarding whether this is simply a bear market rally and if the recovery will be “W” shape and not “V” shape, as I have discussed in previous commentary.

The question is: when will the second leg-up surface? Based on the current data, it could precede the economic recovery and may not happen until later this year or in 2009. Goldman Sachs predicts that the U.S. economy will expand by about 1.9% in 2009 and over 2.0% in 2010. While this indicates expansion, the numbers are not that impressive. The U.S. economy could lag for several years in the worst-case scenario.

Markets remain at a crux and need to break higher, or we could see sideways trading in the immediate future.

The key is not to chase gains higher. There are more buying or trading opportunities surfacing, especially after stocks sell off. When stocks sell off over 50%, this is overdone and there could be an opportunity for a quick gain. As a trader, what you want to do is to watch the screens and pinpoint any stocks that sell off. Check the underlying fundamentals and, if they are intact, you may want to enter into a position. However, you should begin the trade with a small portion so as not to risk too much capital. Have stops in place and buy additional positions if the trade looks good.

Be careful with stocks; given the intraday volatility, setting stops that are too small could see your position closed out quickly on a swing. I have seen this occur on many occasions. On the more speculative and high-trade stocks, the swings can be over 20% over a few days. So, in these cases, you may want to risk a bit more, but, ultimately the key is to trade smaller positions and not to bet the farm, so to speak.