Earnings Season Is the Key

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Includes: EEFT, MCF, MEAS, MERC
by: David Brown

After a fairly positive start last week, earnings season began in earnest this week. Two tech bellwethers, Apple (NASDAQ:AAPL) and IBM, both handily beat estimates. Those announcements came after hours, with Apple recovering some of what it lost after yesterday’s announcement that Steve Jobs was stepping down for health reasons. Goldman Sachs (NYSE:GS) reports on Wednesday; Google (NASDAQ:GOOG) on Thursday; and General Electric (NYSE:GE) on Friday. Next week, earnings action speeds up even more.

The market closed up before the announcements from Apple and IBM, with the S&P 500 gaining 2 points to reach 1,295, another 30-month high. This, despite a couple of disappointing reports — Delta Airlines (NYSE:DAL) and Citibank (NYSE:C). Citibank had a much worse than expected report on earnings, revenue, and write-downs on its bond portfolio. The stock lost more than 6% today, though it is up slightly in the aftermarket. This could trigger more fears about the bond market which many economists think is almost certain to decline.

“Don’t worry, be happy” seems to be the market’s mantra at the moment. VIX, the fear indicator, has slipped even lower, and the sectors that normally signal market jitters — Utilities, Health Care and Consumer Non-Durables — were at the very bottom of last week’s sector performance rankings. Aided by a weak dollar and a strengthening euro, the market is shrugging off any concerns about whether or not QE2 is working.

Week in Review. Several important economic numbers were released last week, including the inflationary barometers, Producers Price Index (PPI) and Consumer Price Index (NYSEARCA:CPI). While the raw numbers of both indexes were up, the core numbers — which exclude food and energy components — were actually quite tame, assuring the market that inflation is still at bay. Retail sales were slightly negative compared with expectations, but that was somewhat offset by a very good industrial production report.

Small caps have resumed the leadership role in cap/styles, and large caps are back to bringing up the rear. As for sectors, Finance and Energy led the way as expected, both up more than 4% for the week. Consumer Durables and Capital Goods continued to surprise to the upside, while Technology and Basic Industries performed about as expected.

The Week Ahead. In addition to the important earnings releases mentioned earlier, we get a peek at the mercurial housing sector this week, with reports on housing starts & permits on Wednesday and existing home sales on Thursday. Thursday also gives us the leading indicators report, along with the weekly initial jobless claims, which will answer the overarching questions: Will the claims dip below 400,000 again, as they did at year-end, or will they stay firmly above that level, as they have in the first two weeks of 2011?

As for where to invest in this market? Based on our SectorCast forward-looking rankings, we will be looking for small-cap stocks in the Basic Industries, Technology and Energy sectors, and avoiding the Transportation, Consumer Services and Consumer Durables sectors.

4 Stock Ideas for this Market

This week, I started with the GARP (Growth At a Reasonable Price) preset search in MyStockFinder , but limited it to only small caps from Basic Industries, Energy, and Technology sectors. Here are four intriguing stock ideas worth considering.

Mercer International (MERC) – Basic Industries
Contango Oil & Gas (MCF) – Energy
Euronet Worldwide (EEFT) – Technology
Measurement Specialties (MEAS) – Technology