— by George Leong, B. Comm.
Investors are getting ready for the flow of first-quarter earnings this week. The importance will not be so much the earnings, but what the companies say as far as the guidance going forward in the rest of 2009 and into 2010. Trading was relatively subdued last week, as investors did not want to take a position into the weekend with earnings coming.
Since closing above 8,000 on April 3 for the first time since early February, the DOW has retrenched below 8,000 and is struggling to hold at the support levels.
First-quarter earnings and the fear that the guidance will be weak are driving some to take profits. I would look for some buying support on dips. The first-quarter earnings and guidance will help drive trading over the next month. Companies have a better idea on demand as they are in the marketplace. We fully expect earnings will be weak for at least several more quarters and, depending on the economy, could then begin to improve. Despite the four-week rally, there are some fresh concerns regarding whether this is simply a bear market rally.
Investor sentiment has improved and there are some encouraging technical and chart signs, but we are not at the point of calling a bottom. Stocks could retrench if the recession lengthens. The first-quarter earnings season began unofficially last Tuesday after Alcoa Inc. (NYSE/AA) reported a massive loss after the bell. The decline in demand for metals is not unexpected given the global recession and Alcoa indicated more uncertainty going forward.
On the commodities front, the June gold broke below $900.00 to the $880.00 level, as capital flowed back into stocks. We continue to like gold, but you need to watch to see if support levels hold. The near-term technical picture is bearish with weak Relative Strength. Gold is oversold, so watch for some support at the 200-day moving average of $870.10. A strong break below would drive additional selling.
The CRB Spot Index, a measure of 22 commodities, appears to have bottomed at 200 and is currently attempting to break 230. Yet you need to watch, since there may be a bearish double top in the works. The CRB is indicating that the economy may be setting up for a turnaround, as the basket of key commodities is showing some signs of turning up. The peak for the CRB was June 1, 2008, when the index traded at 467.60 prior to the subsequent slide. The low was at the 180 level in late 2001.
In my view, the key will be how markets trade in the upcoming weeks. The reality is that there is plenty of cash on the sidelines waiting for some early signs of a market turn. Once that happens, there will be a lot of money to be made. The key is that you want to make sure you have cash on hand to buy at some point in the future. Do not risk your capital chasing gains now, as it could be a false rally with more downside.