Market is a forward looking mechanism

When you see a GDP growth below one percent and at the same time market rallying to new high, probably the market has already discounted the poor GDP and is anticipating GDP growth rate recovery.

PONDER this apparent mystery. In the three months to the end of September, the American economy grows at its slowest rate in almost four years as the long-feared housing market slump shows up for the first time in blunt statistical reality.

But in precisely the same three-month period, the stock market bulls ahead. The Dow Jones industrial average breaks through its record level (set back in early 2000, when the economy was coming off its fastest rate of growth in almost 20 years) and then ploughs on through the 12,000 barrier with apparently no sign of slowing.

Is the market behaving irrationally? Are investors failing to properly discount the real risk of an outright US recession? Or is the market acting as it is supposed to, as a forward-looking, rather than coincident, indicator? Will the third quarter of this year turn out to be the nadir of the slowdown, with corporate profits in the coming six months fully validating investors’ optimism in the durability of the US expansion?

Analyst rush to revise earnings estimates

Like a broken record I keep repeating look at the earnings to understand markets. Here is the latest update on earnings from Zacks.

The most important point in this analysis is :

Looking ahead to next year, the revisions ratio has finally pushed above 1.0, to 1.07. This ratio has been trending upward over the last few weeks and sits slightly above our last reported number, 0.96.

I consider this ratio to be extraordinarily important. With the economy slowing, housing in a free fall and the yield curve inverted, one can easily make an intellectually coherent case for a recession next year. However, there has never been a recession where earnings grow at anything close to a double-digit rate. This is the elephant in the room that must be explained by any recession predictor. There is no way that the expected growth rate will come down unless estimate cuts exceed estimate increases.

Expect the bears to spin this. The fact is the earnings are much stronger than the macro analyst and bearish TV pundits make it out to be. Some of them have no idea about how to interpret earnings trend and those following them blindly will be in for rude shock.

With over 59% of the S&P 500 reported, third-quarter earnings results thus far have been a positive surprise and show a clear win for the bulls. Median reported EPS growth sits is 12.3% and positive analyst surprises outnumber negatives by over 4:1. It seems that investor�s low expectations for third-quarter earnings reports have proven unfounded. Though there are still over 200 companies in the index left to report, it�s clear that the market�s recent run-up now has a leg to stand on.

So far, the growth leaders have been the Telecom and Industrial sectors. Telecom has only seen four of its 10 companies report, however, so the numbers are not very telling. On the other hand, over 70% of Industrials have reported, and the numbers have clearly boosted the sectors outlook. Positive surprises outnumber negatives in the sector by over 7:1 and the median surprise sits at an impressive 3.1%. Median reported third-quarter growth for both sectors has been 26.1% for Telecom and 21.7% for the Industrials.

The growth laggard at this point in the reporting season is Consumer Staples, with a median growth of 7.4%. This is more favorable than expected however, as the sector�s surprise ratio is over 5:1, with a median surprise of 2.5%. The two earnings surprise leaders for the sector were Estee Lauder (EL) and Supervalu (SVU). Food firms Conagra (CAG) and McCormick (MKC) also posted double-digit surprises.

Cautious but not negative

The market acted the way it should on Friday, trapping the late bulls. Even though I am cautious I am not negative in the long run on the markets. The market is in correction mode. Where it goes from there , I will play week by week. Corrections in bull markets are sharp and vicious shaking out most late bulls and offering a mirage to short sellers and bears. It is too early to say the rally is over.

As a practical matter, it makes greater sense to respond to known market conditions,like breakouts, relative strength, earnings, momentum etc. In that thinking mode it allows allow you to adjust our stance as conditions change. Conversely, if you position yourselves based upon a macro prediction about the future, you are stuck with defending that prediction until it comes true or sticking with it until you lose enough that you are forced to capitulate.

Market action during the period from May 2006 to the present serves as a prime example of how the hypothesis based investor miss good profit opportunities. During the decline from the May top it was broadly accepted that the bull market top was finally in place and that a major decline was beginning. The rally out of the summer lows was dismissed initially as a short-term technical bounce in the context of a longer-term decline. The bears held fast. They became vociferous. As prices approached the level of the May top, they hoped that a bearish double top was forming. The bears stuck to their hypothesis.

Now the last couple of weeks of rally left the bears with little on which to hang their hats. It is easy to tell apprenticed investor to trade what you see and not what you think, but hard to practice for the gurus themselves.


There are number of negative things in the news cycle for the market to keep climbing wall of worry. The negative or just barely positive GDP number is what is making bears excited. But the market is forward looking mechanism, so it might have discounted that and may be looking many quarters ahead.

GDP, housing, wage growth, etc. might get macro analyst all excited but as a trader you can not trade based on it. As a trader when you look at a piece of data your first question should be what is the trade in this. Does it indicate long or short or neutral trade. Next set of questions should be has the market discounted this news or is surprised by it.

The earnings continue to show a good picture and many of the stocks which had earning acceleration and earning surprise have a long way to go. Overall market action may dampen their rallies for sometime but with a good catalyst, they will resume their upward climb.

50 stocks with bearish momentum

Markets have probably entered correction zone, so good time for short sellers.. Here is a list of stocks with recent bearish momentum characteristics. If the market corrects at these level, some of these stocks will have accelerated downside momentum. If you are bearish guru followers or if you are enamored by bearish arguments and outraged by the bull move so far, this list might help you find some profitable trades.

If you go through them microscopically, you will probably notice bearish sector trends. Watching momentum can help you both on bullish and bearish side.

To understand more about this list read my old post.

AF,Astoria Financial Corp
AKAM,Akamai Technologies Inc
ALO,Alpharma Inc
AN,Autonation Inc
AT,Alltel Corp
BGG,Briggs & Stratton Corp
BXS,Bancorpsouth Inc
BYD,Boyd Gaming Corp
CECO,Career Education Corp
CFR,Cullen Frost Bankers
CINF,Cincinnati Financial Cp
CKFR,Checkfree Corporation
CMX,Caremark Rx Inc
CTV,Commscope Inc
DADE,Dade Behring Holdings Inc
DRI,Darden Restaurants
EW,Edwards Life Sciences
EWBC,East West Bancorp Inc
FRX,Forest Laboratories Inc
GD,General Dynamics Corp
GNW,Genworth Financial
HLF,Herbalife
HNT,Healthnet Inc
IFIN,Investors Fin Svcs Cp
IR,Ingersoll-rand Ltd Cl A
JBL,Jabil Circuit Inc
JEF,Jefferies Group Inc
LEG,Leggett & Platt Inc
MHK,Mohawk Industries Inc
MHS,Medco Health Solutions
MOT,Motorola Inc
MUR,Murphy Oil Corp
NOC,Northrop Grumman Corp
NTAP,Network Appliance Inc
ORLY,O'reilly Automotive Inc
OSK,Oshkosh Truck Corp
PHLY,Philadelphia Consolidated Holding Corp
PL,Protective Life Corp
PPC,Pilgrim's Pride Corp
SGMS,Scientific Games Corp
SIE,Sierra Health Services
STJ,Saint Jude Medical Inc
THG,The Hanover Insurance Group Inc
TXN,Texas Instruments Inc
UB,Unionbancal Corporation
UHS,Universal Health Svcs B
VSEA,Varian Semiconductor Equipment Associates Inc
WL,Wilmington Trust Corp
WLK,Westlake Chemical Corp
WTNY,Whitney Holding Corp

When to be bullish and when to be cautious

A prince being thus obliged to know well how to act as a beast must imitate the fox and the lion, for the lion cannot protect himself from traps, and the fox cannot defend himself from wolves. One must therefore be a fox to recognize traps, and a lion to frighten wolves.-Niccolò Machiavelli

Earlier in my trading career I used to be caught completely by surprise by days like today, but now the most important skills I have developed is anticipating zones of likely corrections and market turns. It helps a lot in avoiding market traps.

I use a simple indicator to anticipate market turns which I talked about earlier when I became bullish in August. It is based on a ratio of up and down stocks price in last 65 days. It gives you an objective consistently tradable signal. The same indicator was flashing danger signals since last few days. Yesterday when I ran my end of day scans it was clearly flashing trouble, so most of the morning, I spent reducing positions to bare minimum and now watching the action from sideline.


Tuesday, August 01, 2006
Some stocks set for rallies

The overall market action may look dreary but below the surface there is a strong rallies developing in some sectors and it looks like these rallies have legs.
How does a market turn and how can you anticipate market turns. Everyone has different ways to do it and it is a function of your understanding of overall market mechanics. It is also a function of your trading philosophy. Those who go by fundamentals look at stocks trading below a certain valuation levels. The macro players look at interest rates, liquidity, consumer spending, jobs etc. The cycle followers and Elliot wave followers look at cycles and their length. Technical traders look at support, resistance, chart patterns etc. No matter what trading style you follow you should have a way to determine overall market direction.
I follow a very simple objective method to determine market direction. It is based on a ratio of up and down stocks price in last 65 days. It gives you an objective consistently tradable signal. Going by that indicator we have a high probability of a rally developing in next couple of weeks.
When a rally starts developing you will see first set of stocks starts to rally, they have follow through , then more join in. In last couple of days certain set of stocks have started moving and are also witnessing follow through. So the early birds are off and that also gives clear indicator of what sectors are likely to rally.

Interesting trading blogs/sites

There are few trading blogs I track regularly. Many of the most popular are known to people, and some of them offer general commentary on market. Many blogs are just marketing tools for newsletters or other advisory services. There are number of blogs catering to day traders but few blogs by traders have long term approach.

The Instantbull ranking of Best of Breed is dubious. Many of the sites on it are just snakeoil salesmen using their blogs to sell newsletters, some of the newsletters have atrocious returns, hey but they are popular.

Here are two blogs/sites with interesting approach to market. If you go through them, both have very profitable replicable strategy for swing or long term trading.

Wishing Wealth : This one has a interesting twist on CANSLIM strategy.

DJ Interactive Markets : This one is focused on trading small caps using earning and momentum.

Market correction

Markets have not corrected so far and sector rotation continues. But I am now extremely cautious on market direction. Sometimes moves like yesterdays are misleading. So I am expecting a correction at this stage and protecting profits is first priority.

The earning based trades is what I am willing to continue to invest in because, they work very differently.

The big picture on housing

Marc Gerstein, Director of investment research,Reuters.com is one analyst I track regularly. His posts are very insightful and often ahead of the curve. Here is his insightful take on the housing market.

Homebuilder stocks seem to be following the classic Wall Street scrip: buy before bad news turns into good news.

Wall Street lore says bulls can take comfort in the failure of beaten-down stocks to drop further when more bad news comes out. The idea is that this is a sign that bears who correctly anticipated the slump are finished with their selling and that the next major market event will be further buying by those who anticipate the next upcycle. The housing sector may be playing to this script. Yesterday, the National Association of Realtors (NAR) reported that U.S. existing home sales slowed from an annual rate of 6.3 million in August to 6.18 million in September, a bit worse than the 6.2 million forecasted by economists. Nevertheless major homebuilder stocks like Centex Corp. CTX, DR Horton Inc.DHI, KB Home KBH, Lennar Corp. LEN.N, Pulte Homes Inc. PHM.N, and Toll Brothers Inc. TOL rallied.

Business cycles don't turn on a dime, so it's likely we'll see plenty more bad news on the housing front, in terms of industrywide statistics and homebuilder earnings. But it looks like Wall Street is already looking beyond this.

US housing slump likely to avoid recession

A British think tank argues that the housing slump is unlikely to lead to a recession.Most newspapers lead with the story of decline in housing prices. Now is that a surprise, it was expected for long time that at some stage the housing prices will stop going up and decline.

The easy trade on this was over long ago. The home builders will change strategy and tactics to counter this. During the boom the mantra was large houses. Now to improve affordability they will shift to smaller houses. There is lot of talk about discounting by home builders, isn't that a logical response to market conditions. The car makers resorted to 0% financing to simulate demand. Price promotion is a legitimate marketing tool used by millions of businesses worldwide everyday, but the bears make it sound like a scandal or criminal behaviour.


The other point constantly being harped about is options arm. Options arms is the new Y2K equivalent problem. It is so well publicised that most with option arms are already seeking solution to their problem unless they are living in a cave. Mail boxes are flooded with various solutions to option arms, if you read newspapers, or listen to radio the solutions to option arm is the most heavily advertised thing currently. That is the case at least in part where I live, things might be different in the analysts caves.

The worst people to get your information on macro trend is from salesmen. Lot of commentators are quoting the real estate agents as source of their bearish hypothesis. Anyone who has worked long enough with sales people in any industry knows that the worst analysers of trends in industry are sales people. Their view is completely driven by their incentives and commission. Most of them lack long term perspective like the so called macro and big picture analyst who rely on them to form their opinion.

One of the things about housing is that people are willing to live with bad decision for long time. So unless faced with dire emergency no one is going to go and sell house because prices are dropping. Sellers who do not find buyers at the price they want will pull out of market. The worst sufferers are speculators and flippers. Consumer behaviour in high ticket, high involvement, and high conspicuous value products like housing is not as simple as some of the analyst are basing their hypothesis on.

THE slump in the US housing market will see the American economy slow sharply next year, but it is likely to escape a plunge into recession, one of Britain’s leading economics think-tanks said yesterday.

Fears of the scale and impact of the housing downturn were fuelled yesterday after bleak figures showed that the average price of new homes in the US tumbled by 9.7 per cent last month from a year earlier.

*
The steepest annual fall in new home prices in more than 35 years followed figures on Wednesday that showed prices for existing homes suffered a record year-on-year drop of 2.5 per cent in September, the worst fall in four decades.

But despite the price falls, Britain’s National Institute of Economic and Social Research said yesterday that it was very unlikely that the US would be pitched into recession.

Small cap earnings will be in focus next

Next week onwards the earnings focus will slowly shift to small caps. This is where you will find lot of opportunities. The small caps are poorly covered by analyst, many of them have no analyst earning estimate, many do not offer guidance or pre announcement. Many of them are novice in the great Wall Street earnings game, so they are yet to learn earning manipulation. This creates for an interesting trading situation.

Over reactions to earnings are very common in the small cap world. Every earning season a handful of companies from this group will have blowout earnings and then they are discovered by the market. If they have low float then the mixture of blowout earning and low float acts to propel them several percent higher in few months. Many of today's well known stocks like NTRI, HANS, GROW, IAAC, etc were in similar situation few years back.

Some of these are just one earning season wonders, some have the staying power like HANS, NTRI, GROW etc as they continue to show good earnings for next 6-8 quarters and end up making several hundred percent moves. Season of opportunity for earning traders starts next week.

Outrage is not a strategy

Amongst the many emails I get from readers, one category of emails which I file now days under "Outrage", are emails from people who are outraged by the rally.

Just received an email from someone after reading my yesterday's earning post saying 'I am outraged as this rally and bulls like you, you have no idea we are up to our eyeball in debt, earnings are all manipulated, this is just liquidity driven rally, it is all due to leveraged bets........' and so on. Most of these points are well known and there is no lack of bears actively dishing out their bearing prognosis for last 4 years.

Many of these assertions are just twisted logic. For example the point about leverage, now if you study the markets history, compared to what is an acceptable level of leverage today, many years back you could buy stocks on 10% leverage. There are so many ignorant commentators that the apprenticed investors listening to such nonsense are bound to miss out on profit making opportunities.

Earnings have been manipulated for more than 100 years, so what is new in it.Some commentators have discovered it now to buttress their hypothesis. They have no clue about how the earning game is played. You have to look below the hood of earnings, go deeper and you will find very profitable way to trade them. There is difference between earning surprise and real earning acceleration.


Outrage is not an investment strategy. What is the trade in your outrage. If you are outraged you still need to find market to go short. There is no shortage of stocks going down. If you have methodology to find them, you will find both long and short candidates.

The problem with just being angry, outraged and sitting on sideline is, unless you are selling newsletter or commenting on TV and get paid to do it, you are just wasting your time. You would do much better channelising that outrage in to developing profitable strategies.

Tracking a Macro theme

For sometime I have been tracking the macro theme of disaster called Euro. While very few people in US are noticing it, it is a major theme in European media. It is slowly unfolding and it has far reaching consequences for the dollar bears and the US markets.

This article summarises some of the major problems with the Euro.

WHILE MOST of the world’s attention has naturally focused on the catastrophe of Iraq, the nuclear showdown in North Korea and the electoral nemesis approaching for George W. Bush on November 7, it has also been an interesting week in Europe.

Hungarians marked the brutal suppression of their democracy by Soviet tanks 50 years ago by rioting against their elected Government. In Italy, the Government’s credit rating was reduced to the same level as Botswana’s, and Romano Prodi seemed on the verge of losing a vote of confidence, just six months after sweeping his reviled and derided predecessor, Silvio Berlusconi, from power. The British Home Secretary welcomed Bulgarians and Romanians into the European Union by restricting their ability to seek jobs.

*
The Iraq invasion, disastrous though it has been, may not go down in history as the greatest political blunder of the past decade. That dubious honour will probably belong to an event most people still regard as a triumph: the creation of the euro. What we see today, not only in Italy and Hungary, but also in the other relatively weak economies on the southern and eastern fringes of the EU, is the beginning of the end of the European project. And if the euro project does turn out to be the high-water mark of European unification, then history will judge it a far more important event that anything happening in the Middle East.

Earnings Are Looking Good

This explains why the market started rallying mid August. Now the next sector will come in play soon. The great earnings game continues.

The returns on the third-quarter earnings “election” are flooding in. Through the close of Tuesday, a total of 215 or 43% of S&P 500 firms have reported third-quarter results. Based on the trend that is developing, we are prepared to call this one for the bulls.

Keep in mind that not all “precincts” have called in. For example, no utilities have reported so far, and even within some of the individual sector “races”, there are some industries which report earlier than others.

This said, the results so far are very encouraging, with positive surprises out pacing disappointments by almost a 5:1 ratio. The median year-over-year growth rate for the S&P 500 is 12.74%, very much inline what we have seen in recent quarters. Once again the highest growth rate is in the Energy sector at 73.68%. However within the sector, most of the results reported so far have been among the Oil Service firms. This would be the equivalent of the inner city precincts reporting for the Democrats in a district, with the outer suburbs still to report in. The overall number will come down sharply when all is said and done.

Still, with seven of the nine reports in higher than expected, that race is shaping up as a landslide for the bulls. In five of the 10 sectors, positive surprises are out pacing disappointments by more than 5:1, and in every sector positive surprises are outpacing negative surprises and matching reports combined. Every sector with the exception of Financials so far is showing double-digit growth.

In terms of median surprise, the Tech sector is doing best with a whopping 10%, followed by Energy at 6.58% and Telecom at 4.31%. Don’t read to much into the Telecom number though as it includes only two reports. The Materials sector is the laggard in terms of surprises, with a median surprise of only 0.79%, and over 30% of the reports disappointing. However, that appears to be mostly a case of failing to meet very high expectations as the median growth reported so far is a very respectable 48.48%.

FOMC

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.
2006 Monetary policy

50 Stocks with bullish momentum

Stocks which are going up continue to go up. The momentum effect is well known on wall street. If you believe in momentum trading and willing to ride some of these trends up, there are lots of opportunities in this list. Not all of them make good long candidates. Some might breakdown. But there are enough in this list to keep you busy.

Many of the stocks in this list are currently blessed by the market goddess.

To understand more about this list read my old post.

ALGN,Align Tech Inc
AMAG,Advanced Magnetics Inc
AMIE,Ambassadors Internat Inc
ANGN,Angeion Corp
APN,Applica Inc
AXR,Amrep Corp
AZL,Arizona Land Income Corp
BITS,Bitstream Inc
BVX,Bovie Medical Systems
CCOI,Cogent Communications Group Inc
CLEC,Us Lec Corp Cl A
CPY,Cpi Corp
CRVL,Corvel Corp
CTIB,Cti Industries Corp
DGIT,Dg Fastchannel Inc
DTLK,Datalink Corporation
FCSE,Focus Enhancements Inc
FTGX,FiberNet Telecom Group Inc
GEO,Geo Group (The)
GROW,U.S. Global Invest Inc A
IAAC,Internat Asset Holdg Cp
ICOC,Ico Inc
ILMN,Illumina Inc
ININ,Interactive Intelligence
INPH,Interphase Corp
ISIG,Insignia Systems Inc
JST,Jinpan Internat Ltd
LMRA,Lumera Corporation
LNOP,Lanoptics Ltd
MEH,Midwest Express Holding
MWRK,Mothers Work Inc
NGA,N Amer Galvanizing & Coatings
NVEC,Nve Corp
NYMX,Nymox Pharmaceutical Corp
OCNW,Occam Networks Inc
OLAB,OraLabs Holding Corp
OMG,Om Group Inc
OMNI,Omni Energy Services Cp
PMTR,Pemstar Inc
RMTR,Ramtron Internat Corp
SIGA,Siga Pharmaceuticals Inc
SIM,Grupo Simec S A Adr
SOFO,Sonic Foundry Inc
STEC,Simple Technology Inc
SWHC,Smith & Wesson Hldg Corp
TRT,Trio-Tech Internat
UAHC,United American Healthcare Cor
UUU,Universal Security Instruments
VSNT,Versant Corporation
ZONS,Zones Inc

Steel melts up

The steel stocks have been super performers since the rally started after the dot com burst. Steel the old technology, is the current hot sector. As regular reader know, I have been bullish on steel for long time. The reason is simple, just follow the earnings and momentum.

Many investors make the mistake of getting enamored by a particular hot technology and ignore the old industry. Many times established industries go trough painful restructuring and consolidation and repair their cost structure and profit margin. Once they start showing good earnings acceleration, the market discovers them again.Steel is one sector which has gone through that phase.

Expanding economies in India, China and Middle East has also helped the steel sector to consistently outperform on earnings and sales growth. Many of these stocks still have more juice in them and most of them have just started moving up after a long consolidation. So it is not late to get on to steel bandwagon. Other metal stocks are also starting to show good momentum. So inflation theme should reemerge soon.

Following earnings and price acceleration would always get you in to right sector and right stock. It will give you a distinct edge over clueless investors and traders. It also helps you look at markets/sector or stock objectively.One of the very profitable ways to trade the market is by following earning based strategies. As I keep saying the worst kept secret on the street is earnings matter. If anyone else is telling you otherwise then either he is a fool or wants to sell newsletter or is TV pundit or perma bear.

The steel stocks
AKS,Ak Steel Holding Corp
CGA,Corus Group Plc
CLF,Cleveland-Cliffs Inc
CMC,Commercial Metals Co
CRS,Carpenter Technol Corp
FRD,Friedman Industries Inc
GGB,Gerdau Sa Ads
GNA,Gerdau Ameristeel
GNI,Great Northern Iron Ore
HSC,Harsco Corp
HSVLY,Highveld Steel & Vanadi
IIIN,Insteel Industries Inc
IPS,Ipsco Inc
MEA,Metalico Inc
MG131,Steel & Iron
MM,Metal Management
MT,Mittal Steel Company N.V.
MTL,Mechel Steel Group OAO ADS
NSS,Ns Group Inc
NUE,Nucor Corp
NWPX,Northwest Pipe Co
OS,Oregon Steel Mills Inc
PCP,Precision Castparts Corp
PKX,Posco
RIO,Companhia Vale Do Rio Doce
ROCK,Gibraltar Steel Corp
RTP,Rio Tinto Plc Adr
SCHN,Schnitzer Steel Indust
SID,Companhia Siderurgica Nacional S.A.
SIM,Grupo Simec S A Adr
STLD,Steel Dynamics Inc
STTX,Steel Technologies Inc
SYNL,Synalloy Corp
TONS,Novamerican Steel Inc
TPO,Tarpon Industries
TS,Tenaris Sa
TX,Ternium SA
USAP,Universal Stain & Alloy
WOR,Worthington Industries
WPSC,Wheeling-pittsburgh Corp
ZEUS,Olympic Steel Inc

50 stocks with bearish momentum

While the market continue to churn at these level, there are some stocks which are not actively participating in this rally. Some have broken down recently after rallies. This list essentially contains stocks with possible short sell opportunities. Not everything is at ideal sell point but you should find at least 5 good short ideas in this list.

The earning anticipation trade in August was easy trade, going forward the market might again get stuck in range. With market running in gaps, a correction is overdue, so may not be a bad time to look closely in to some short opportunities.

ACF,Americredit Corp
AF,Astoria Financial Corp
ALO,Alpharma Inc
AMD,Advanced Micro Devices
APOL,Apollo Group Inc Cl A
BF.B,Brown-forman Corp Cl B
BGG,Briggs & Stratton Corp
BK,Bank Of New York Co Inc
BRCM,Broadcom Corp Cl A
BXS,Bancorpsouth Inc
CAT,Caterpillar Inc
CECO,Career Education Corp
CIEN,Ciena Corporation
CRI,Carter Holdings Inc
CTXS,Citrix Systems Inc
DGX,Quest Diagnostics Inc
ENDP,Endo Pharmaceuticals Hld
EW,Edwards Life Sciences
EWBC,East West Bancorp Inc
FRX,Forest Laboratories Inc
GLW,Corning Inc
GYI,Getty Images Inc
IFIN,Investors Fin Svcs Cp
IN,Intermec Inc
JNC,Nuveen Investments Inc Cl A
LEG,Leggett & Platt Inc
LM,Legg Mason Inc
MOLX,Molex Inc
MOLXA,Molex Inc Class A
MON,Monsanto Co
MOT,Motorola Inc
OSK,Oshkosh Truck Corp
PKG,Packaging Corp Of Amer
PPC,Pilgrim's Pride Corp
RDN,Radian Group
SGMS,Scientific Games Corp
SLM,Slm Corp
SNDK,Sandisk Corp
STJ,Saint Jude Medical Inc
TRI,Triad Hospitals Inc
TRID,Trident Microsystems Inc
TRMB,Trimble Navigation Ltd
TXN,Texas Instruments Inc
UB,Unionbancal Corporation
UHS,Universal Health Svcs B
UTIW,UTI Worldwide Inc
VRTX,Vertex Pharmaceuticals
WL,Wilmington Trust Corp
WMG,Warner Music Group Corp
YHOO,Yahoo! Inc

Gaps, gaps and more gaps

Several gap ups post earning. When you see so much froth, its time for some caution. Many of these will require lot of sideways actions before these stocks make further progress.

Yet Another Quarter of Double-Digit Earnings Growth

As I have said repeatedly, the markets started rallying in expectation of good earnings. As long as earning trends continue to be robust, the bears can spin it whichever way they like it. The markets will correct or pullback. The market is not going to go suddenly in to melt down phase unless earnings slow down dramatically.

Tracking earnings can give you a good insight in to market and sector moves.

With over 29% of the S&P 500 reported, the third-quarter earnings season is well underway. The results thus far have been undeniably positive. Median reported EPS growth sits at nearly 11% and positive surprises outnumber negatives by over 5:1. As the Dow continually reaches for new highs, it’s clear that the market has taken a sharp turn from the worry days of mid-summer. As reports ramp up, the lagging corporate performance indicator will come into much clearer focus. These results will help dictate whether or not the market’s newfound enthusiasm has a leg to stand on.

So far, the sectors seeing the largest number of companies reporting have been Financials and Consumer Discretionary. Both sectors have performed well, with positive to negative surprise ratios of 5:1 and 9:1, respectively. Another top performer, the Materials sector is leading the pack in terms of median growth. Of the 20% of Materials companies reported, the median firm has grown EPS at nearly 46%, quarter over quarter. This number is expected to fall off sharply however as new reports come in. Median Q3 growth for all Materials firms listed in the S&P 500 is expected to come in at a still solid 21%.

For the full S&P 500, analysts are expecting 10% median third-quarter growth. Just two weeks ago, the expected growth was 8.6%. If this growth rate proves accurate, it will be slightly lower than the 12.9% seen last quarter. If on the other hand, positive surprises continue at the rate seen so far, the growth rate would be very similar. Going into each of the last two quarters, growth was expected to be much lower than it later proved to be. That pattern seems to be repeating itself.

Long term range break

Each market cycle is characterised by different groups of stocks leading the market higher or lower. While most people are focused on the usual sectors and stocks, below the surface a very different dynamics are going on in the current rally. I have two or three scans which are based on a long range breakouts. I am witnessing a large number of high volume breakout in stocks which have languished in range for years. Normaly these scans have days without anything showing up.

Many established old companies or in case of some cyclical sectors stocks tend to languish in specific trading ranges for long periods, often years. These kind of stocks more or less stay within the upper or lower boundaries of their trading range for years unless something dramatically changes in the fortunes of the individual company or sector.

A breakout in such stock is often a harbinger of big change in the industry condition or supply demand dynamics. Many times these trends are not apparent when these stocks breakout but becomes more apparent after few months or years when the underlying conditions are recognised by everyone.Often these kinds of breakouts are precursor of earning acceleration or sales acceleration. The oil and commodities stocks started breaking out of long trading ranges much before their earning started accelerating. These stocks can have powerful moves once they breakout of such multi year ranges. After the move plays itself out they again settle in to multi year ranges.

It can be hypothesised that the big money, the smart money kinds drive such behaviour. Perhaps the reasons for such breakouts will be apparent in few months or quarters but the smart money already knows these things and is acting on the information.

The range scans I monitor are two/three/five year range breakouts and breakdowns and all time high breakout above two years. I mentioned some of the stocks I am finding in these scans in my earlier post today. Over the last one month I have noticed a flurry of stocks breaking out of their multi year ranges. Something is brewing in these stocks. The reason for which would become apparent much later after they have moved much higher.

Market in correction mode

After a rally which found most people on sideline and surprised, the markets seems to be in correction mode. Many stocks moved too far too fast and a reaction here is not an unusual phenomenon. Everyday new set of stocks are breaking out. Many stocks are breaking out of multi year ranges e.g KO,MLHR, LNN, MSFT etc. It is possible, but unlikely such stocks would just turn tell and go back in to range. This market might have more room to run post correction.

Meteors and Fixed Stars

Often I get asked the question, where to find profitable trading ideas. There are many public domain trading systems which have very high returns if you are willing to put an effort in making them work. Many of you who read my blog must have seen that I keep recommending Mark Boucher book The Hedge Fund Edge again and again.

The book has lot of discussion on economy based on Ludwig von Mises economic theory, but inside that book is a very valuable momentum based trading system for short term trading.The most important lesson of the book is that there are two types of stocks, Meteors and Fixed Stars

Meteor is the stock that blasts off; reaches extreme overvaluation; and falls back into obscurity. Meteors are the `fad' stocks that explode up 300% or more in a 1 to 3 year period, then collapse. Fixed Star: Starts the same way as a meteor but does not become extremely overvalued. These stocks sustain steady price growth for years, some more than a decade.

So, how does one find such stocks during their initial moves?

He offers a detailed step by step methodology for this using earnings and momentum. At the crux of it is looking at characteristics of the first one third of a move and based on that predict the next 2/3 rd move. He has found stocks exhibiting certain kinds of volume and momentum patterns in first 21 days of their move have very high probability of making the meteoric move. The book offers complete trading system with risk management, entry and exit strategies for this.

Now if you are TC2007 user your task is simple. Go to Yahoo Telechart2000 users group and look at messages 4502-4510. You will find complete set of scans for trading Mark Boucher system. Those series of scans can help you put it together very easily. You should also find a file explaining the system once you sign up with the group. Run a search in the group with "tbblbg" as search term. tbblbg is the short form for Mark Boucher system and it stands for thrust breakout, breakout lap, and breakaway gap.

If you are a day-trader or short term trader and want a very profitable system, this one is one of the easiest and it works. There are no lack of very profitable systems openly available, why because 99% of people will never trade them anyway because there is more comfort in following a guru or a newsletter or they don't want to put the effort involved in making any system work.

Earnings reactions and over reactions

Now here is a sample list of stocks I have put in my database to track for next one month from past few days of earning releases. This is in addition to database of good earning/sales companies and companies with accelerating earning.

I have positions in some of these. For example look at LNN, I entered on earnings, in few days it is up over 15%. Similarly you can find many plays using earning on both long and short side.

These companies had a high volume reaction at or near top of their range post earnings. So market likes their earning. Not all of them will go up but if some offer low risk entry in few weeks a volume breakout on some of these is what I will look at buying. I keep adding to this list everyday and keep dropping companies which do not react in few weeks.

In my experience of tracking earnings for last 25 quarters, earnings kick off some of the most enduring rallies I have seen. Behind a major move in a stock (making 300 to 1000% move in few years) is somewhere a earning/sales acceleration. You get very good reward for little risk if you can spot it before street spots it in an unknown little company with low float, just about to start on its growth phase.Some rally just for few weeks while some rally for years. The worst kept secret on Wall Street is earnings matter, anyone else who tells you otherwise is either a fool or selling you newsletter service or a TV pundit or a perma bear or a conspiracy theorist.

AAPL,Apple Computer Inc
ADS,Alliance Data
ALB,Albemarle Corp
AMR,Amr Corporation
APH,Amphenol Corp
ARNA,Arena Pharmaceuticals
ASYT,Asyst Technologies Inc
AVCT,Avocent Corporation
B,Barnes Group Inc
BCR,C.R. Bard Inc
CBST,Cubist Pharmaceuticals
CPSS,Consumer Portfolio Svcs
ETN,Eaton Corp
GAP,Great Atlantic & Pacific Tea Company Inc
GWW,W.W. Grainger Inc
IBM,International Business Machines Corp
ILMN,Illumina Inc
IONA,Iona Technologs Plc Adr
JAKK,Jakks Pacific Inc
JKHY,Jack Henry & Associates
JNJ,Johnson & Johnson
JNPR,Juniper Networks
LOGI,Logitech Intl Adr
MAN,Manpower Inc
MAT,Mattel Inc
MEDX,Medarex Inc
MGI,Moneygram International
MHP,Mcgraw-Hill Companies
MTOX,Medtox Scientific
NDAQ,Nasdaq Stock Market Inc
NVEC,Nve Corp
NVS,Novartis Ag Ads
PJC,Piper Jaffray Companies
PLXT,Plx Technology Inc
RBN,Robbins & Myers Inc
ROG,Rogers Corp
SLGN,Silgan Holdings Inc
SNBC,Sun Bancorp Inc Nj
SYK,Stryker Corp
SYNA,Synaptics Inc
SYNT,Syntel Inc
TGIS,Thomas Group Inc
UNH,UnitedHealth Group Inc.
USAP,Universal Stain & Alloy
VIGN,Vignette Corporation

Economist

Economist explains nicely what is happening in the economy currently and why the doom and gloom camp is wrong. Last week I was talking to people in India where currently the festival of Diwali is going on and some of the stories I have heard of shopping sprees and consumer behaviour are unbelievable.

Walk in to any India metropolitan city and you will see streets lined with luxury brands like Cartier, Patek Philippe, Rolex, Hermes etc. What are these people buying with their new wealth, foreign cars, electronics, holidays, luxury items. My sister was telling me in the case of some electronics item there is so much demand that shops are only accepting booking with items to be delivered post Diwali. Many of the technology and electronics good they buy are American. In fact goods manufactured or atleast labeled to have originated from Amrica, Europe command better demand than locally manufactured goods. Because it connotes status to have foreign goods.

It is not just consumers shopping, but businesses are on one of the largest expansion spree I have seen in my lifetime. Huge industrial projects are being set up. There is significant investment being made in machinery and plants. Lot of it is imported or bought from American companies.

The reality in economy is always different from what narrowly focused bears make it out to be. That is why they and their followers are sitting on sideline waiting for doom while the market continues to act well.

AMERICAN consumers have been one of the main engines of global growth for the past decade. But now, as America's housing boom threatens to turn into a bust, many forecasters expect household spending to stall. A few even worry that America could come perilously close to a recession in 2007. Previous American downturns have usually dragged the rest of the world economy down, too. Yet this time its fate will depend largely upon whether China and the other Asian economies can decouple from the slowing American locomotive.


According to conventional wisdom, American consumers have single-handedly kept the world economy chugging along, whereas cautious Europeans and Asians have preferred to save. Yet the importance of America's role in global growth is often exaggerated. During the past five years America has accounted for only 13% of global real GDP growth, using purchasing-power parity (PPP) weights.

The real driver of the world economy has been Asia, which has accounted for over half of the world's growth since 2001. Even in current dollar terms, rather than PPP, Asia's 21% contribution to the increase in world GDP exceeded America's 19%. But current dollar figures understate Asia's weight in the world, because in China and other poor countries things like housing and domestic services are much cheaper than in rich countries, so a dollar of spending buys a lot more. If you want to compare consumer spending across countries, it therefore makes more sense to convert local currency spending into dollars using PPPs rather than market exchange rates.

Heavy Metals

Steel and other metal related stocks are in rally mood for some time. Steel is the star performer with some steel stocks melting up. There are lot of opportunities in this sector and opportunity to get on to some of these moves. Some of these stocks have very good earnings and are headed much higher.

With steel in rally mode can silver and gold be far off. Inflation talk will be back with a bang.

Earnings and cockroaches

The earning season is now in full swing and you see lot of volatility. Good earnings are immediately rewarded and bad earning or slight miss or guidance lowering is swiftly punished. There are many traders who advise staying away from the earnings season. But if you want to develop a long term and substantial edge in trading, understanding earnings might be one of the ways to do it.

My most profitable strategy is based on trading earning and sales acceleration. I have been closely tracking earnings for past 25 quarters or so. Many sector trends become very apparent during the earning season.

Some of the most powerful and enduring trends lasting months or years are set in motion by earning acceleration or deceleration. The oil stocks started showing significant earning acceleration two and half years ago, which was followed by significant price growth. Look at EBay, an earning miss many quarters ago precipitated a long down slide. Look at Chicos (CHS), after several quarters of god earning and exceeding earnings, a miss in one quarter ended a long running up move( which had started in the middle of severe bear market with earning acceleration). Earnings and sales growth are the fuel which drive prices high in most stocks.

There is a well known theory called cockroach theory to explain why the market behaves in such a manner to earning news. The cockroach theory holds that just as you rarely find one roach in the cupboard, you will rarely find a single earnings surprise, good or bad. Behind the theory is the idea that an earnings surprise can often signal a change in the long-term outlook for future earnings.

Still long but cautious

The market is at a stage where protecting profit from last 6-10 weeks is now critical. I am still long but extremely cautious. Protecting profits in existing positions is first priority currently.

There are still opportunities both on long and short side. I continue to see more and more stock joining the momentum universe. Some stocks which started out rallying in August are breaking down or correcting. At the same time number of stocks with recent good earning will continue to rise.

Whether you were bullish or bearish, there were opportunities on both side during the last couple of months. Many investor often make the mistake of being completely smitten by a hypothesis and stay on side line. Some are completely smitten by a guru or newsletter writer or TV personalities. In many cases they have no methodology to select stock. While I am primarily a long oriented trader, if you have been reading various comments left by Walter on various posts over the last couple of weeks, you would have seen he has a method to find stocks on short side and he has found opportunities in this rally on short side.

One of the ways to make money in the market is by focusing on equity selection methodologies. You should have a methodology to find individual stocks likely to go up or go down and play them. There are several ways to do this. What I talk about often earning/sales/price momentum is just one way of doing it. Value investor use different set of parameters to find good equities. Skillful short traders find shorts in most market circumstances by using various methods.

One of the wonderful thing about life and trading is, as they say once you decide the north of your life, you can find many ways to get there.

James Altucher , water and theme investing

A reader asked me what do you think of water stock as long term holding. He has read James Altucher banging the table on them for over a year and wants to know my opinion.

Today I read an interview with Marc Faber saying water will be tomorrow's oil. The problem with theme following is you do not know, whether it is long term trend or fad. Plus identifying themes is a special skill few people posses. You do not know when James Altucher got in to these stocks, what his cost basis is or is he selling them currently.

Lot of themes never prove profitable. Many months back, I was reading about some hedge fund which was identifying the bird flue fighting industry as new theme. I don't know whether that fund still exists today or quickly switched to another theme. Similarly when the Dubai port issue was hot, I heard one of the TV gurus proclaiming port security as the new investment theme. Those who invested based on that theme must be still waiting for those stocks to tick up.

Some year back fiber was the hot theme. There was supposed to be so much demand for fibre and so on. All of you know what happened to that.

The only theme based investing I do is using earning/sales or price acceleration as theme. If any one of these themes really becomes hot the stock in that industry will either have earning/ sales or price acceleration. I have one water stock in my holding currently LNN, why because it came on my earning screen. If you just follow the earning/sales or price trend you will never miss any of the new themes.

If you are looking for theme to invest, here is red hot theme. Buy a casket full of following stocks.
AWGI,Alderwoods Group Inc
CSV,Carriage Services Inc
SCI,Service Corp Internat
SNFCA,Security National Financial Corp Class A
STEI,Stewart Enterprises Cl A
STON,Stonemor Partners L.p.


With so many baby boomers aging, you can't go wrong with these stocks.

Be careful when you see so much of junk gapping up on minor news as you see today. Expect markets to hit serious air pocket.

Junk Sale

If you have been watching the IPO market, it is hot currently in terms of number of IPO in pipeline and number of stock which have IPOed recently. When there is demand, there is supply. The investment bankers and IPO companies time these thing very smartly, when the gullible public is in buying mood. I always keep a close watch on this indicator.

Couple of months ago, thee were hardly 2-3 IPO coming in the market. Many IPO were withdrawn. Now if you have been watching for many weeks there has been an upsurge in IPO. In fact the first clue of market change direction you will find is when some big brand name IPO are about to debut. The backers of IPO have some inkling about likely market direction and always look for sweet spot where they can distribute share easily in rising markets. If you see a weak market and if there is forthcoming big good quality IPO, it possibly indicates rally ahead.

As a rally progresses more and more speculative IPO start entering the market. It is easy to pass off junk when everyone is in euphoric mood. So many people are holding on to their ethanol and alternative energy IPOs, which was palmed off to them during the energy rally. The tricks on Wall Street remain the same. They work because there is constant supply of new gullible fools.

Expecting a very volatile few weeks ahead as earnings keep coming.

50 Stocks with bullish momentum

Stocks which are going up continue to go up. The momentum effect is well known on wall street. If you believe in momentum trading and willing to ride some of these trends up, there are lots of opportunities in this list. Not all of them make good long candidates. Some might breakdown. But there are enough in this list to keep you busy.

Many of the stocks in this list are currently blessed by the market goddess.

To understand more about this list read my old post.

AKAM,Akamai Technologies Inc
ALGN,Align Tech Inc
AMIE,Ambassadors Internat Inc
ANGN,Angeion Corp
APN,Applica Inc
AVNC,Advancis Pharmaceutical
AXR,Amrep Corp
BITS,Bitstream Inc
BVX,Bovie Medical Systems
CCOI,Cogent Communications Group Inc
CHDX,Chindex International Inc
CLEC,Us Lec Corp Cl A
CPY,Cpi Corp
CRVL,Corvel Corp
DGIT,Dg Fastchannel Inc
DTLK,Datalink Corporation
FCSE,Focus Enhancements Inc
FMCO,Fms Financial Corp
GEO,Geo Group (The)
GIGM,Gigamedia Limited
GMTC,Gametech Internat Inc
GROW,U.S. Global Invest Inc A
IAAC,Internat Asset Holdg Cp
INAP,Internap Network Svcs Cp
ININ,Interactive Intelligence
INPH,Interphase Corp
ISIG,Insignia Systems Inc
JST,Jinpan Internat Ltd
MEH,Midwest Express Holding
MWRK,Mothers Work Inc
NGA,N Amer Galvanizing & Coatings
NVEC,Nve Corp
OCNW,Occam Networks Inc
OLAB,OraLabs Holding Corp
OMG,Om Group Inc
PMTR,Pemstar Inc
PSMT,Pricesmart Inc
RMTR,Ramtron Internat Corp
SIGA,Siga Pharmaceuticals Inc
SIM,Grupo Simec S A Adr
SOFO,Sonic Foundry Inc
SPAR,Spartan Motors Inc
STEC,Simple Technology Inc
SWHC,Smith & Wesson Hldg Corp
TATTF,Tat Technol Ltd
TRT,Trio-Tech Internat
UAHC,United American Healthcare Cor
UUU,Universal Security Instruments
VSNT,Versant Corporation
XING,Qiao Xing Univ Telephone

50 stocks with bearish momentum

Not all stocks are participating in the rally. Here is a list of stocks with recent bearish momentum characteristics. If the market corrects at these level, some of these stocks will have accelerated downside momentum. If you are bearish guru followers or if you are enamored by bearish arguments and outraged by the bull move so far, this list might help you find some profitable trades.

If you go through them microscopically, you will probably notice bearish sector trends. Watching momentum can help you both on bullish and bearish side.

To understand more about this list read my old post.

APOL,Apollo Group Inc Cl A
BF.B,Brown-forman Corp Cl B
CBH,Commerce Bancorp Inc Nj
CHRW,C.H. Robinson Worldwide
CIEND,Ciena Corporation
CL,Colgate-Palmolive Co
CLE,Claires Stores Inc
CMX,Caremark Rx Inc
CTX,Centex Corp
CVH,Coventry Health Care Inc
CYH,Community Health Systems
DADE,Dade Behring Holdings Inc
DDS,Dillard's Inc
DGX,Quest Diagnostics Inc
ERIE,Erie Indemnity Co Cl A
ESRX,Express Scripts Inc
ET,E Trade Financial Corp
EWBC,East West Bancorp Inc
FL,Foot Locker Inc
HCR,Manor Care Inc
HD,Home Depot Inc
IN,Intermec Inc
JOE,Saint Joe Company
KBH,Kb Home
KR,Kroger Company
LCC,US Airways Group Inc
LM,Legg Mason Inc
LNG,Cheniere Energy Inc
LPNT,Lifepoint Hospitals
LYV,Live Nation Inc
MCK,Mckesson Corp
MHS,Medco Health Solutions
MON,Monsanto Co
PBG,Pepsi Bottling Group Inc
PEP,Pepsico Inc
PKG,Packaging Corp Of Amer
PNC,Pnc Financial Svcs Grp
PSYS,Psychiatric Solutions Inc
SGMS,Scientific Games Corp
SLM,Slm Corp
SWY,Safeway Inc
THE,Todco
TIN,Temple Inland Inc
TRI,Triad Hospitals Inc
UHS,Universal Health Svcs B
UNH,UnitedHealth Group Inc.
UTIW,UTI Worldwide Inc
VAR,Varian Medical Systems Inc
WOOF,Vca Antech
YHOO,Yahoo! Inc

A day like today

Stocks with long term momentum plus stock with earnings/sales catalyst do not break easily. Their topping process is long drawn process. The reason being these are owned by institutions or are under accumulation by them. When they decide to sell, they because of the size of their holdings, sell slowly or distribute them slowly to gullible late stage investors. That is why stocks take long time to form top and selling short does not work immediately at top. While on bear side, stocks turn on a dime.


Stocks which are at momentum extremes breakdown because at some stage there are no more buyers , so the greater fool theory comes in place. The last bit of investors are left holding the bag.


In corrections like today, which I was anticipating, what happens is lot of weak and speculative stocks which also move in a broad based rally like we are witnessing , they reverse. Some of the stocks which were on tear have negative days, but they will consolidate/pullback, the trend is still up. What has broken down today is lot of stocks which were clinging to bottom of their range.


The bull market corrections are scary and sudden, shaking out lots of positions. New set of stock attracted buying interest today. It is also healthy to see profit taking in morning and buying in evening, which has been characteristic of this rally so far. That indicates big boys at play.


The market should have some healthy correction or sideways move here for couple of weeks, that way the rally will be healthy. But you seldom get chance to get back in bull markets easily. That is the nature of the beast. The best strategy in bull markets is to buy breakouts, if they are from consolidation or little weakness and supported by volume, it indicates big boys buying.


This move is not going to end without a fight.

Positive EPS surprises have outnumbered negatives by 6:1

Here are the latest trend on earnings from Zacks. No major worries so far and some earnings play continue to act well.

While Alcoa�s (AA) negative surprise last Tuesday got the �official beginning� of the third-quarter earnings season on a sour note, most of the news has been positive. To date, 42 companies out of the S&P 500 have reported and the results have been overwhelmingly positive. Positive EPS surprises have outnumbered negatives by 6:1 and the median surprise is an impressive 3.7%. With the Dow hitting new highs and energy prices continuing to trend downward, the market seems to be shrugging off fears of a near-term recession. As reports ramp up however, it will be much easier to see how corporate earnings performance matches up with the market�s renewed bullishness.

So far, the sector�s seeing the largest number of companies reporting have been Consumer Staples and Consumer Discretionary. Firms with double digit upside surprises include Circuit City (CC), Mccormick (MKC), and Supervalu (SVU). No firms in either sector reported a negative surprise. The Tech sector has also seen excellent EPS performance thus far with a median surprise of nearly 9.4%. The surprise ratio stands at 5:1. Adobe and Tektronix lead the charge, with 13.6% and 14.3% respective EPS surprises.

The yearly trends show no sign of recession.

On a full-year basis, earnings growth for the S&P 500 is expected to remain solid. Double-digit gains are expected on both a median firm and total net income basis. On a median basis, growth for the current and next fiscal year is expected to be 13.1% and 12.9%, respectively. This growth rate has stayed relatively stable over the last several weeks. On a total earnings basis, the growth rates are more skewed towards this year, at 15.1% versus 10.4% next year. While the total growth rate is certainly predicted to slow, by no means is a 10.4% year-over-year growth rate tantamount to predicting a near-term recession. On the other hand, if the recent trend toward more downward revisions than upward revisions continues, those expected growth rates will deteriorate.

The analyst who writes this report has no bone in the bullish or bearish fight. Now given the same data bears are out twisting it to suit their hypothesis. That is why they are losing credibility and followers. If you want to understand markets study the earning trends.

Enduring edges and paradigm

A young woman was driving her new sports car very fast down a mountain road. The top of the car was down, and she was enjoying the wind through her hair. As she drove, she thought resentfully of her parents who had told her she was reckless in a car and would get killed one day if she wasn't careful.

Suddenly as she came up to a curve, an SUV with a male driver and six kids appeared in her lane. She swerved onto the shoulder and stopped, barely missing the SUV. The driver yelled at her through his open window, "Pig!" Thinking quickly, she yelled back, "Bull!"

As the SUV disappeared from sight, she at least felt contented that she had been able to respond to his insult. She stepped on the accelerator, and squealed her tires as she went around the curve. She crashed into the very large pig which was standing in the middle of the road.

A version of a joke told by the writer of the book Paradigms, Joel Barker in his seminar. That illustrates very well the reaction of people with hard wired existing paradigms to new set of information.

When I posted yesterday about the structural anomalies in market, I got couple of emails from people. Some asking for more details, some saying its all bull shit, if it worked why wouldn't hedge funds use it.

Your existing paradigms determine how you react to new information. If you believe that such anomalies exist and can be exploited profitably, you will search for them, you will notice many like them. I am aware of at least 20 of them and I know of people who have found 100 or more of them. Obviously many of them are not in public domain, there are hints of them but they are not spelled out.

A few are so well known and so well researched that if you do not know of them, it does not mean others do not use them. Some of the most sophisticated hedge funds and investors base their entire strategies on such things.

When I started data mining, I did not know many of these things , but I discovered them and then later when I discovered the works of some of the highly respected academics in this field, they had also found same thing.

It is a great pity that some of these books which have excellent profit making ideas do not sell on Amazon. What sells is books written by charlatans talking about technical analysis and waves and stuff like that. What is popular and conventional wisdom is not necessarily the right or the most profitable way to trade. Most of the hardcore technical analyst fans are like that young women in SUV, unable to see another paradigm.

The key to finding an edge

The key to finding an edge is to find market anomalies. Markets are not random. For many years studies after studies have shown two anomalies which make profits

1 PEAD- Post Earning Announcement drift
2 Momentum effect


PEAD- Post Earning Announcement Drift

Each quarter when companies report their earnings, there are usually a handful of companies whose earnings are either surprisingly good, or shockingly bad. You can immediately recognize these companies by the post earnings announcement jump or plunge in their respective stock prices. So far so good. But now fast forward, say, three quarters. If you take a look at all the stocks that had negative earnings surprises, you find that on average these stocks continued to go down. Similarly, the stocks that had positive earnings surprises continued to go up, on average. In other words, the stocks with earnings surprises exhibit post earnings announcement drift, or PEAD for short. Now this is weird. Every finance professor will tell you that this isn't suppose to happen. If the stock market is efficient, what should happen is a one-time jump in the stock price when earnings are announced.

This PEAD effect was first identified in a paper published in 1968, almost 40 years ago. Generally, when research on market inefficiencies is published, people start trading against the inefficiency and the anomaly goes away. But not with PEAD. Subsequent papers have overwhelmingly found the same result. PEAD is considered one of the most robust stock market anomalies around. And, so far, nobody really knows why....

Momentum effect

There is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum.

Hundreds of studies have shown this behavior continues in the market years after year. Like this there are many anomalies and if you find them you will not have to worry about making money and losing your edge. I basically trade 5-6 such anomalies. Each one of them have a statistically proven edge and logic as to why they work.

Many of these things are in public domain for years. Why people don't trade them, because most people are lost in technical analysis jungle. Secondly many people trade on too short a time frame to capture returns from such strategies. Some of the most profitable systems are based on finding such anomalies.

Wallstrip Duh

If you have noticed lot of bloggers have been promoting the Wallstip site in recent weeks. Today it is up and running with an episode on Apple stock. They say Apple is up because of retail outlets. That is utter nonsense.



Apple is up because it has new product and earning acceleration as a result of that. The correct graph of Apple would be with earnings superimposed. The worst kept secret on the street is earning drives stock prices.

Going by the first episode its a dud and the anchor looks silly, it is poorly scripted and the jokes fall flat. Very amateurish thing.

The so called expert commentary by bloggers is even worse. If investors are going to invest based on this then all the best. As long as this kind of uninformed non sense continues, traders with edge do not have to worry.

Stocks with bearish momentum characteristics

Not all stocks are participating in the rally. Here is a list of stocks with recent bearish momentum characteristics. If the market corrects at these level, some of these stocks will have accelerated downside momentum. Also if you go through them microscopically, you will probably notice bearish sector trends. Watching momentum can help you both on bullish and bearish side.
To understand more about this list read my old post.

AGO,Assured Guaranty Ltd
AVP,Avon Products Inc
CIEND,Ciena Corporation
CL,Colgate-Palmolive Co
CLE,Claires Stores Inc
CMX,Caremark Rx Inc
CVH,Coventry Health Care Inc
CYH,Community Health Systems
DADE,Dade Behring Holdings Inc
DDS,Dillard's Inc
DGX,Quest Diagnostics Inc
DWA,Dreamworks Animation Skg
ESRX,Express Scripts Inc
ET,E Trade Financial Corp
EWBC,East West Bancorp Inc
FADV,First Advantage Corp Cl A
FGP,Ferrellgas Partners L.P.
HCR,Manor Care Inc
HUM,Humana Inc
IN,Intermec Inc
K,Kellogg Co
KR,Kroger Company
LM,Legg Mason Inc
LNG,Cheniere Energy Inc
LYV,Live Nation Inc
MCK,Mckesson Corp
MHS,Medco Health Solutions
PBG,Pepsi Bottling Group Inc
PEP,Pepsico Inc
PKG,Packaging Corp Of Amer
PNC,Pnc Financial Svcs Grp
PPC,Pilgrim's Pride Corp
PSYS,Psychiatric Solutions Inc
SFD,Smithfield Foods Inc
SIE,Sierra Health Services
SLM,Slm Corp
STX,Seagate Tech Hldgs
STZ,Constellation Brands Inc
SWY,Safeway Inc
THE,Todco
TRI,Triad Hospitals Inc
UNH,UnitedHealth Group Inc.
VAR,Varian Medical Systems Inc
WOOF,Vca Antech
YHOO,Yahoo! Inc

Market headed for correction

Expect a market correction at these levels. It will be quick and painful to lot of people who after waiting on the sideline for months have just about become bullish. It will be good to shake out some of the late market comers and euphoric crowd. After that market would quickly resume its uptrend. Nothing much changes in the market.

Stocks with long term momentum

Here is a list of stocks with long term momentum characteristics as of Friday close. This list contains stock below 30 also.

ALGN,Align Tech Inc
ANGN,Angeion Corp
APN,Applica Inc
BVX,Bovie Medical Systems
CLEC,Us Lec Corp Cl A
CPY,Cpi Corp
DGIT,Dg Fastchannel Inc
DTLK,Datalink Corporation
FCSE,Focus Enhancements Inc
FMCO,Fms Financial Corp
GIGM,Gigamedia Limited
IAAC,Internat Asset Holdg Cp
INAP,Internap Network Svcs Cp
ININ,Interactive Intelligence
INPH,Interphase Corp
ISIG,Insignia Systems Inc
MEH,Midwest Express Holding
MWRK,Mothers Work Inc
NGA,N Amer Galvanizing & Coatings
OLAB,OraLabs Holding Corp
OMG,Om Group Inc
SIM,Grupo Simec S A Adr
SOFO,Sonic Foundry Inc
STEC,Simple Technology Inc
SWHC,Smith & Wesson Hldg Corp
TRT,Trio-Tech Internat
UAHC,United American Healthcare Cor
VSNT,Versant Corporation
XING,Qiao Xing Univ Telephone

Stocks with long term momentum characteristics

Most people on the street look at momentum traders as low life form. It is considered immoral to buy something just because it is going up. What a waste of MBA if you can make money without reading balance sheets.

But if you do not have those hang ups you will find many ways to trade pure momentum based system with low risk. If you design it properly,you will not miss any major trends. I have been discussing various methods of trading momentum with a select few readers of the blog who had shown an interest in learning about them. So far we have discussed 5 different ways or variations of basic momentum strategy and various tactics and tricks and scans to make them work.

A well designed momentum strategy identifies opportunities in all sorts of market environment. The strategy is extremely simple to use. All these things require no expensive real time data software, no newsletter fees, no understanding macro stuff like interest rates,inflation, deflation, or stuff like PE, cash flow, earnings, or stuff like double top, C&W, wedges and so on. No looking at 1000 charts at night.

Here are some of the stocks identified using it over the course of last few weeks( only those above 30).


AEOS,American Eagle Outfitter
AEPI,Aep Industries Inc
AKAM,Akamai Technologies Inc
AXR,Amrep Corp
BAP,Credicorp Ltd
BDC,Belden Inc
BGC,General Cable Corp
CHAP,Chaparral Steel Company
CHTT,Chattem Inc
CPY,Cpi Corp
CRM,Salesforce.com Inc
DECK,Deckers Outdoor Corp
ELE,Endesa Sa
ENR,Energizer Holdings
EZPW,Ezcorp Inc Cl A
FLSH,Msystems Ltd Ord
FMD,First Marblehead Corp
GES,Guess? Incorporated
GVA,Granite Construction Inc
GYMB,Gymboree Corp
HITT,Hittite Microwave Corp
ICE,Intercontinental Exchange Inc
INFY,Infosys Technologies Ads
LFC,China Life Insurance Company
MWRK,Mothers Work Inc
NEU,Newmarket Corp
NRPH,New River Pharmaceuticals Inc
OMG,Om Group Inc
PCLN,Priceline.com Inc
RIMM,Research In Motion Ltd
SHOO,Steven Madden Ltd
UARM,Under Armour Inc
VIP,Vimpel Communication Ads
WRLD,World Acceptance Corp

Change of focus

The large caps have had some very good moves in couple of months. But the small caps have not been far behind. The markets is at level where correction is a normal next course of action. But anyone proclaiming DOW 6000 by year end at this stage is completely wrong and probably has very poor understanding of how markets work. The possibility and probability of that happening is very low.

What will happen is markets will correct at this level, shake out lots of bulls, some stocks will have nasty reversals and once again get stuck in range. Select set of stocks are poised for significant up moves and they will go up.If you have a methodology to identify them, you will not be worried about Armageddon. That is why instead of focusing on macro issues focusing on central market tendencies will pay you rich dividends for life time.

Here are some stocks showing up on my scans.
BITS
CAMT
CHINA
CSH
DLLR
EZPW
FSII
HITT
KNXA
LPTH
MFN
OLAB
SUMT

Denial ain't just a river in Egypt

There are bulls, there are bears and then there are clueless who blindly follow a bullish or a bearish guru.

One of the trick of being a successful guru and to keep your followers still under your spell is to deny alternative reality.

You can see live examples of that on many sites currently. Many followers have realised guru is fraud. Trader Mike has in his links a link about: Great Comment Over on the Perma-Bear Blog

Those apprenticed investors who relied on the advise of such bears are realising their mistake now.

Another prominent guru also has series of comments like that on his blog. Does it affect the gurus. No. How do they react. By denying reality.
But Only Dow is going up
But only few Stocks in DOW are going up
But This is all liquidity driven rally
But earnings don't matter
But Alcoa earning is down
But jobs have not grown so this rally is all head fake
But the DOW is not cheap
But those who are buying housing stocks at this level are just fools
But I am the only real contrarian

No wonder some of these gurus appear weekly on CNBC, from where they gain their clueless followers.

Breakouts a galore

The market continues to act well. It might have correction now, but that is very healthy thing. Many stocks are set to go a long way. Focusing on stock selection remains the key.

Some breakouts in my scans are:

AG
AHS
AKS
AMX
AOB
BKI
BONT
CCBL
CHNR
CLHB
EZPW
FLSH
GSTL
ICON
INB
KVHI
LNN
NYNY
OLAB
OMG
PLCE
SIMC
SNMX
TRA
TYL
WEN

Bears are enjoying the rally

Time to bring back my old graphics as the market gets ready to correct after teaching clueless bears a nice lesson.

THE "CROWD" GOES WILD!!

A fellow trader emailed me this. If this data is true, we are in for some interesting times.

THE "CROWD" GOES WILD!!

(October 10th, 2006) The Chart of Interest shows you the weekly short sales by the public, or the so called "crowd" or "herd" (dumb money), divided by total weekly NYSE volume, compared to the weekly short sales by NYSE members (smart money). NYSE members are all the well known Wall Street broker firms. They have the best brains and analysts working for them and the have tons of money as well. Short selling by the public has now hit levels like never before in recorded stock market history. It is therefore most unlikely that the market is even near a top, because the "crowd" has until now never beaten the Wall Street pros. (Chart of Dow Jones enclosed for comparison)

Market themes

Here are few things I am noticing currently:
Sector rotation New sectors and stocks are emerging to take on leadership. Which often is a sign of healthy up move.

Metals Stock Metals stocks are finding a bid and some like steel have started rallying from bottom of their range.

Retail Some retail stocks are consolidating after good run and some like the sports retailers are finding fresh bids.

Speculative sectors like semi conductor, technology and biotechs are finding bids.

One of my key database scan of stocks making more than 25% or more move in a quarter from a low point is showing 1097 up movers to 277 down movers. So market may have correction, but the momentum generated so far will not die down in a snap. I don't know whether it is suckers rally as bears claim it to be, but any rally which makes me money is good rally as far as I am concerned. I am finding no shortage of profitable opportunities so far. I don't mind being a sucker as long as I am a profitable sucker.

Why are value investors loading up on home builders

I was going through the Blog Watch column by James Altucher, where he talks about ModernGraham's list of 15 favorite value stocks trading at low P/E ratios. Now here are the 15 stocks.
SPF, PHM, KBH, MDC, LUK, RYL, ASH, CFC, DHI, LEN, TOL, ORI, FNF, RS, CB

So why are they loading up on home builders, while bears are telling you to short them. Because they understand how market works and have confidence in their methodology. They believe based on future earning potential, these stocks at these price present compelling value.

I am not a value investor, but I have studied the methods of value investors in great detail and understand what they do and why they do it. I have great respect for their methodology and way of thinking. Also I understand from my study of mutual funds that vast sums of money is devoted to value strategy. Now that kind of understanding gives you a different perspective on the market.

Many years ago in one of the University talks Warren Buffet was asked what is his daily routine and he replied, something to the effect " I look at the 52 week low list in New York Times, pick up a Cherry Coke and start researching those companies further."

Market moved higher in anticipation of good earnings

Market started a move higher in mid August. One of the factor possibly driving this move higher was the earning. If you have been following the earnings picture , you would have got a good understanding that the earnings were very healthy in spite of the doom and gloom scenario. Sometime market moves in anticipation and sometime it moves post earning. Lot of earning expectations is already priced in to these levels so there might be a correction till the future earning trend becomes clear. But let us watch and see. For several quarters now companies have been underpromising, analyst have been under estimating( effect of post Blodget phenomenon)and companies are handily beating estimates.

On individual stock levels same thing happens. Once you understand this game in detail and if you make an effort to look below the hood and go in to microscopic detail in to how these things work, you will find many wonderful ways to profit from it on both long and short side.

Immense amount of energy and efforts are spent by the shrewed investors, the big investors, and the Goldman Sachs of the world in trying to get a handle on earnings. Especially for large cap stocks and S&P the game is about anticipating earnings ahead of the crowd.Talk to any large mutual fund managers or pension fund manager or some very successful hedge fund managers and the language they talk is all about earnings and valuation. Trillions of dollar asset allocation depends on the P and E factors.

If you see some of the widely followed and profitable methods on street like Value Line or CANSLIM , they are all based on earning momentum.

The formula is secret, but Value Line does publish some of the ingredients that go into it. Stocks tend to get high ranks if they have a run of quarterly earnings gains, beat analyst forecasts and have recent share-price gains in excess of the market's. There's a bias, in other words, toward momentum plays. This is a run-with-the-crowd system, and it makes sense for in-and-out traders.

Paradoxically, the Value Line ranking system is also useful for the polar opposites of momentum players, namely, contrarian investors. They go for out-of-favor stocks, often with recent earnings disappointments, on the theory that these will eventually make a recovery and reward patient holders. Here it makes sense to start with the stocks ranked lowest for near-term performance.

Look at some of the very shrewed traders interviewed in Market Wizard. Focus on some who have had a track record of very high returns and under that you will find earnings based strategies. Mark Minervini who was on of the most reticent trader in those interviews, essentially follows an earning plus price momentum based strategy, if you read below the surface. Publicly available data shows he had several triple digit years.

Mark Boucher the author of The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies is another hedge fund manager who had in early days triple digit returns. He describes in detail his methodology for short term trading in that book.It all boils down to earning and price momentum.

I always like to focus on traders who made triple digit kind of returns when I read or interact with traders. My logic is simple, if I can understand even half of what is their methodology and can adopt it, I am better off than following someone who makes 20% per annum.So when I meet some of them, I badger them with questions till they are tired. Another book which has interviews of traders with triple digit kind of returns is The Best: TradingMarkets.com Conversations With Top Traders . Now if you look at the methodology of some of the traders interviewed in that book who had years with very high returns you will find earning and momentum as two common threads.

I have been studying currently the history of mutual funds and some of the most successful funds which had very high returns for an extended period of time ( they may not be super performers currently) and the common thread in their success, you guessed it right, is earning and momentum.

Few weeks ago, I was approached by a trader and software developer who was enamored by the book How I Made 2,000,000 in the Stock Market by Nicolas Darvas and wanted me to test his software. I told him Darvas success had nothing to do with the box theory, it was more to do with his stocks selection. If you see the stock he selected to trade they had either very high earning growths or momentum during that period. If you select right stock, anything even technical analysis works on it. He was not convinced and continues to perfect his boxes.

Obviously it is not simple to covert the understanding that earnings move markets and stocks in to profitable method. You have to go in to lot more details to make it work. Similarly momentum based strategies work provided they are designed properly.

Once you understand the earning and momentum game, you don't need the CNBC, or any other analyst. You might be able to figure out for yourself why I said months before anyone else that oil stocks are headed for correction. When you start to understand and read earnings, you will notice many things like these before most analyst. It is my submission that most traders get lost in he technical analysis jungle early in their trading career because there are so many charlatans selling them the magic potions, that they never find a way out of that jungle.

The other problem is most of what you hear on TV and read about on many immensely popular blogs is macro analysis. Now macro style trading is not for everyone, certainly not for those trading few millions. Even the best of the investment banks do not depend on macro traders to make their year. What macro traders make is bonus to them.

For an individual trader equity selection is the key to superior returns. Earning and momentum based strategies is one of the proven ways select equities. There are other also.

Don't take my word for it. (only 50 people read this blog!!!) Question everything.Be your own analyst. Be your own guru.

Soon you would need a super computer to invest in ETF

Roger Nusbaum is pointing out some information about 16 more ETFs poised to enter the market soon. ETF were supposed to simplify investors life and reduce fees. With a choice of over 300 ETF by now, the decision to invest in which one is not going to be easy. Ultimately again if you want to outperform the market, you will need to chose the right one. Ultimately it will boil down to equity selection.

One of the eternal problem in investing world is of managing complexity and choice. One of the ways to manage this complexity problem is to concentrate on equity selection or vehicle selection methodologies. No matter which religion you follow- growth or value ultimately it all boils down to equity selection.

The idea behind ETF was to eliminate the complexity involved in vehicle selection process. But with so many choices, it has come full circle. If you are going to concentrate on vehicle selection as primary out performance strategy, then why ETF and why not individual stocks.

This complexity is the reason why intermediaries like mutual funds, investment advisers, hedge funds, brokerage analyst and newsletter writer will continue to survive. It is a basic human nature, when faced with complexity and choices, seek an expert. Long intermediaries. Short too many ETFs.

USG and why the home builders may not be good shorts

There is an interesting discussion going on in the comments section about why the home builders may not be good shorts.

walter said...

when will the housing long be played out? as you mentioned, it was a while back when the whole world was down on housing - but it never went down...

sooner or later, bulls will have to take profits - what would you look for?

you dont think its too late to get in on the long side?

8:44 PM
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Pradeep Bonde said...

In my understanding of the market there are basically three types of investors growth, clueless and value. Each one has a different perspective and time horizon. The homebuilders are shifting hands, the value funds are buying them. They hold it for long time. There is huge amount of capital invested in value strategy.

The other thing is there will be private equity groups willing to buy out homebuilders if they go down further. Warren Buffets kind of investors would step in to buy them if they go down further. So essentially the value types will put a ceiling on any down ward moves.

So the home builders will probably spend 2-3 years stuck in range around these price levels.
Some of them will go down. Some will be bought, some will merge.

The clueless are the shorts who think homebilders are like dot com companies. Some are still short. With all due respect to Doug Kass, he has pounded the table on housing stocks short for third time. Previous two times he did it, the stocks went up. Selecting shorts is never an easy task even for the pros.

There might be a short trade possibly developing in some of them as some will probably revisit the bottom of the range.

Frankly I think there are better risk reward shorts than homebuilders in this market. But that's just my opinion.

4:58 AM
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walter said...

agree - why short them now? the big gains to be had are gone...

thanks - shorting comes easier to me, so i look for shorts regardless of the overall market... that being said, i need to be reminded, from time to time, about the market mechanisms like value investing, etc.

8:23 AM
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Pradeep Bonde said...

In my experience so far, to pick good shorts , you have to pick the sweet spot between growth and value.

Growth stocks sour and the growth crowd starts dumping them. The value crowd waits for it to reach their target valuation zone as they want to buy dollars worth of assets for few pennies. There is significantly higher asset allocation to value than growth.

The growth crowd chases the new , new thing while the value guys believe in holding for eternity.Growth crowd looks at 52 week high, value crowd looks at 52 week low as buying opportunity.

Easy money on short side is made shorting when you can catch some part of this transition.

But like in long it ultimately boils down to equity selection. Rest is all tactics..

8:44 AM

Look at USG, to understand how this growth and value game works. Warren Buffet is increasing his stake in USG. It is near 52 week low. Prospects for home building suppliers are supposed to be bad. Now what does he know that housing bears do not know. What is wrong with him. He should read The Apprenticed Investor series.

Probably he is drunk. I think he drinks too much Cherry Coke!!!

USG Corporation (the Corporation), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. United States Gypsum Company (U.S. Gypsum) is a wholly owned subsidiary of the Corporation. The Company's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 54%, 12% and 34% during the year ended December 31, 2005

Its all about earnings

The latest earning trends do not show major worries on horizon so far. Like many other things in life, learning's are cumulative. I have been religiously following earnings for many seasons and the more you do it, more you understand about it. The Zacks analysis is always a good place to figure out long term trends in earnings. You will get many clues to impending sector or market moves once you understand what this earning game is all about. Till then for most it sounds like Greek.

The third quarter earnings season is beginning, first with a trickle, but it will soon turn into a flood. For the 25 companies reported thus far, 22 have reported above expectations. Negative revisions for both this year and next however, put a shade of grey on these preliminary results. Our revisions ratio, which is calculated by dividing positive analysts’ revisions by negatives, is below one. This means that of the 1,250 fiscal 2006 analysts’ revisions compiled over the last four weeks, 657 were negative. This gives an 2006 EPS revisions ratio of 0.90. While the rise in the revisions ratio is good news, eight of the ten sectors had negative revisions ratios for the year, with only the financials showing significant strength. The ratio for fiscal 2007 is even worse, at 0.80. On the bright side, the 2006 revisions ratio has been climbing for the past two weeks, after having bottomed out at 0.71. The unfavorable 2007 ratio however, has held solid at its current value. If both ratios remain at their current levels as third quarter reporting picks up, it could be the canary in the coal mine. The high expected earnings growth rates indicate that the economy will remain healthy, despite disturbing indicators such as an inverted yield curve and a plunging housing market. So far the negative revisions ratios have yet to put a meaningful dent in the earnings expectations. This is mostly due to the low absolute numbers of revisions during this slow season.

The S&P 500 is set to post double-digit median growth for both this year and next. This is true regardless if measured on a total net income basis or a median firm basis. Current downward revisions would have to lower EPS values substantially and across multiple industries before our overall earnings outlook turns bearish.