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| Shocking scenes in Egypt made the markets uneasy |
The market is getting the flush Friday as global turmoil and poor economic data finally pushed the overbought indices over the edge. The stock market is a funny thing, and it often takes a contrarian mindset to forecast moves. After the sloppy action last week, everyone was calling for a short-term top, but the wounded market picked itself up off the mat. During the late rounds, though, the violent scenes from Egypt and lower-than-expected GDP growth served as the knockout blow.
Bears had started to finally throw up their hands this week as technically damaged charts repaired themselves and pressured market leaders like Apple Inc. (AAPL) and Google, Inc. (GOOG) recovered. The buzz word in the market since September has been resilience, and the recent bounce-back was chalked up as the latest example of that. However, this time around the confluence of factors was more than stocks could handle. In this type of market, once shorting becomes embarrassing is often the only time it works.
Scott Redler and others over at T3Live.com had abandoned the core portfolio type of trade last week in favor of a more low-risk, quick hit approach after the sloppy action and technical damage. With the first close below the uptrend, it’s time to start watching the moving averages for potential support before we start approaching more significant technical levels. Now, let’s take a look at the week that was (hint: the tone has changed a bit after today’s beatdown).
Earnings
We continued into the meat of earnings season this week with a series of strong reports. Last week, Google and Apple both reported stellar earnings, but separate CEO controversies and profit taking sent the stocks lower. We perceived this type of action as an ominous sign for the market. This week, we continued to see some negative reactions to seemingly strong reports, with a couple notable exceptions.
Cloud computing
Cloud stocks had another chance at impressing with earnings, but the narrow beat and 2011 margins warning from VMWare, Inc. (VMW) failed to do so. The sector did get a bit of a lift later in the week with a strong report from IBD #1 stock Riverbed Technology, Inc. (RVBD), but remains a bit sloppy. You may want to consider playing the PowerShares Dynamic Networking Portfolio (PXQ) to avoid headline risk in individual cloud companies after seeing the carnage that can ensue following an earnings report.
Fertilizer Stocks
The agricultural sector has been another focus for us over the last few weeks, and our faith in the fertilizer names was rewarded this week after a few important announcements from our favorite in the group, PotashCorp./ Saskatchewan (POT). The sector was rocked by Cargill’s decision to offload its 64% stake in The Mosaic Company (MOS). POT, however, turned the tide after reporting a solid earnings report, noting strong demand for potash products, doubling its dividend and announcing a 3 for 1 stock split to take effect in late February.
Big Cap Tech
In the rest of the tech sector, it took a blockbuster report to trade higher, another sign that the market was standing on shaky ground. Narrow beats that had any sort of negatives inside of them were sold off hard, examples coming in the form of Microsoft Corporation (MSFT), which beat across the board but noted weak sales of Windows 7, and Amazon.com, Inc. (AMZN), which also beat on earnings and revenue but showed poor operating margins. Netflix, Inc. (NFLX), a controversial stock with a heavy short interest, continued to be the hottest stock in all the market with another stellar report. The stock gapped up almost 15% after its report and continued higher, closing the week with a 21% gain.
Precious Metals
It was a roller coaster for gold and silver this week, with most of the ride moving downwards. Metal bulls have been trying to buy the dip in the beaten down commodities, and were frustrated before today’s strong bounce. Gold engulfed yesterday’s extreme breakdown, a positive long-term signal, while silver engulfed the last couple weeks of weakness. Both look like they could be great buys in this area with the fear trade returning with the violent protests we are seeing around the world, some due to inflation.
In Conclusion
Corrections are inevitable during bull markets, and the longer this ridiculous recent run went on, ultimately the more potent the breakdown was going to be. It’s like a rubber band stretching longer and longer, and then getting released. Prudent active, technical traders were able to note the sloppy action and get out of core positions, even though the damage was a bit of a delayed reaction. You can’t just fall asleep behind the wheel of a Ferrari and expect not to get in a crash at some point.
In fact, pullbacks are a healthy process for bull markets. We will now get lower prices to buy into the market, thus limiting risk and providing greater peace of mind to buy and hold for longer time frames. Everyone have a great weekend, and let’s get after it again on Monday.
*DISCLOSURE: Scott has no positions
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