Futures are pointing to a down open Tuesday after Monday’s rally as investors continue to digest the meat of earnings season. After the close yesterday, virtualization leader VMWare, Inc. (VMW) beat analyst estimates on the top and bottom line, but warned new hiring could like lead to flat margins in 2011. VMW initially traded sharply higher after the announcement but has dropped 5% overnight as investors began to dig deeper into the report. The reaction comes as another blow to the cloud computing sector that was hit hard after F5 Networks, Inc. (FFIV) trimmed outlook last week, sending sector stocks plummeting. This morning so far, however, most other cloud stocks are holding up fairly well.
Today we will see several pieces of data, highlighted by the Case-Shiller home price index at 9 am ET and consumer confidence at 10 am. Today marks the beginning of a two-day FOMC meeting. Later tonight, President Obama will deliver the State of the Union address, where job creation and economic growth are expected to be the major focus. On the earnings front, we continue to see a series of noteworthy reports. EMC Corporation (EMC) narrowly beat analyst estimates after seeing rising demand for its data storage solutions. Operating revenue fell at Verizon Communications, Inc. (VZ) and the stock is trading 2% lower this morning.
For more commentary on specific stocks, check out Scott Redler‘s daily Pricepoint Sheet.
Solar Powerful
The market has continued to hold up despite a perpetually oversold reading, even despite leadership at this point becoming very sloppy. After a strong report, International Business Machines (IBM) is leading the way, with semiconductors and solars not far behind. Both of those sectors seem to have more left in the tank, says Marc Sperling of T3Live.com, so watch them closely the rest of the week.
The solars had been out of play during the second half of last year, but have perked up and started to act better. Sperling likes JinkoSolar Holding Co., Ltd. (JKS), LDK Solar Co., Ltd. (LDK), ReneSola Ltd. (SOL), and First Solar, Inc. (FSLR) in the solar group and Broadcom Communcations (BRCM) and Novellus Systems, Inc. (NVLS), which has a great base after earnings, in the semis.
Gold and silver continue to exhibit weakness, and if this selling persists the long term uptrend will come under pressure. Be patient with these for now, says Sperling, but do not stop watching them. Complacency reigns right now, but there are still major economic issues facing this country and Europe, while the seeds of inflation have been planted. This could eventually be the large dip we need to feel confident buying commodities for the next leg higher.
Magnet: OYOG Surges
Bulls were back in control Monday with a firm 2 to 1 advance-decline line. In the Magnet stock selection system, semis and solars have also starred, says Jordan Kimmel of T3Live.com. He noted his colleagues in the T3Live community have been all over those sectors since last week.
Last week the manic action got a lot of people talking top, but instead it has simply to take some profits in select extended stocks. The market continues to see rotation although many leaders have gone through a rough patch. When stocks get extremely overbought and extended, and you see the market selling off strong earnings reports, that is a time to tier down.
Money flowing out of bond funds and money markets will need to find a home, and Kimmel believes large cap domestic stocks will become their favored destination. While conservative investors may not have as much of a thirst for small and mid-cap momentum stocks, some of the more large-cap, value stocks could get a lift. Now let’s take a look at the top ranked Magnet stocks.
Magic Software Enterprises Ltd. (MGIC) is ranked #1 overall on the list, and it hit a new high on expanding volume yesterday. Institutions only own 3%, so there is plenty of room for money to flow in.
Acacia Research Corporation (ACTG) is ranked #2 and tried to break out last week but pulled back on lighter volume. Let’s see what happens with earnings.
SOL and LDK are the two most highly ranked solar stocks on Magnet. As mentioned, the sector has been playing catch up after lagging last year and looks to have significant upside. Power-One, Inc. (PWER) is another highly ranked Magnet company that operates in the renewable energy sector, and is gathering strength.
After highlighting OYO Geospace Corporation (OYOG) yesterday the stock jumped more than 5%. Kimmel says he will be locking in some profits but will hold more than half for follow through on this promising stock.
Foster Wheeler AG (FWLT) is one of the only Magnet shorts showing up right now, but despite weak fundamentals has continued to drift higher on low volume. While believing the washout will come at some point, Kimmel sold most of the position yesterday and will not fight the technical action.
Not So Fast, Rally
The Russell 2000 is starting to look weak on a daily chart according to Evan Lazarus of T3Live.com, who will be looking for a calculated short of the index via TZA, the 3x leveraged short ETF. The idea place to enter the trade would be on a breakout through $16 with stops at previous lows and a target of $19. Leveraged ETFs should only be played by active traders, but a play in TZA presents a good short term risk-reward ratio.
*DISCLOSURE: Scott is long SHZ, AMZN; Short SPY. Marc is long NVLS; Short SPY. Evan has not positions. Jordan is long MGIC, LDK, SOL, ACTG, OYOG, PWER; Short FWLT.
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