The Dow (DIA), Nasdaq (QQQ) and S&P 500 (SPY) have all made impressive gains from their lows last summer, but these gains were made during a time of unstable economic growth and cannot be maintained.
The factors are not all in place for sustained economic expansion. The December jobs report failed to provide any traction in trading on Friday. In fact, the whole week was unimpressive. Yes, the QQQ was up 3.5% for the week, gapping up from last week and last year's close, but volume was off. Investors are wary of global economic events. Europe is in the forefront of everyone's mind. Two questions being asked by investors and traders; How bad will Europe's debt troubles get? How will the US be affected? We have yet to find out. The estimates for 2012 are for 2.3% growth, only slightly better than 2011's 1.8%. Unemployment is expected to remain above 8.5% into 2013. I think it is overly optimistic to expect any real increase of the Nasdaq market value. Events in the Eurozone are still unfolding and are expected to last through 2012. China is slowing by at least a half percent this year. In an article published by Voice of America, China's State Council estimates the country will grow about 8.5% this year, down from 2010's 9%. PIMCO has estimated China's growth at 7.5%. Banks around the world have been bracing for this contraction for months, cutting jobs across the region. India is being hit particularly hard by this trend.
This week marks the start of earnings season. The top line numbers won't be as important as what the reports say about future expectations. Analysts are downgrading stocks like mad, uncertainty in Asian strength and concerns over European fall-out are finally being taken seriously. One downgrade of note is Intel (INTC). Intel is expected to be hurt by the new ARM (ARMH) style chips. Intel is producing its own smart phone chips but is not expected to make up for the lost market share.
Three stocks to avoid are Oracle (ORCL), Cisco (CSCO) and Comcast (CMCSA). These three stocks have been trending sideways for over 12 months and I don't see any reasons for them to go higher.
Oracle, which recently announced a big miss, has gapped down to a long-term support/resistance level, leaving the stock in a precarious technical position. Cisco Systems is bouncing back from a test of its long-term support, but with weak momentum and several near term resistance levels. Technically, Comcast is in the worst position. It is currently trading around $25 on average volume, testing a resistance level set during a head-and-shoulders reversal. The 2012 outlook for these stocks is not enough to bolster investor confidence. A lack of interest will keep these stocks range bound for at least the next year.
Oracle, whose shares lost over 5% last year, is still trading around 12 times earnings. Institutional and insider ownership is high, but will not keep share value up. The stock yields less than one percent as a dividend, not even close to the average return available amongst the US most stable companies. Oracle is a leading seller of business software, a market that is seeing big cut backs. In its most recent earnings release new software licenses increased by 2% over the same quarter of the previous year. Analysts had been expecting double digit growth of this metric. The slowing of the world economy will continue to impact business spending and the tech sector.
Cisco Systems is in much the same boat as Oracle. While Cisco is involved in a slightly different business than Oracle, networking and network solutions, its business is an important link in business technology. The stock is currently trading around $19, CSCO is apparently forming a bull triangle, but don't be fooled. The results for fiscal Q1 2012, released in November of last year, show some solid gains in earnings and profits, based in part on organizational changes. In a recent release, Gartner lowered estimates for 2012 IT business spending by nearly a full percent. The slowing global economy will impact Cisco in 2012.
Cisco has been trending up since August of 2011, in line with the general market. It has been forming a triangle, usually a bullish sign, on weak volume and momentum. Currently trading around $19, CSCO is brushing up against as major resistance level. This level was set in February of 2010 when Cisco gapped down on high volume, losing 14% of its value. I expect to see CSCO trend down to $15 over the next year.
Comcast (CMCSA) is facing increasing pressures from alternate media sources. Comcast was able to increase subscription rates amongst cable and high speed internet users but suffered a decline in advertising revenue. CMCSA is currently trading around $25 with a p/e of 17. Comcast has been range bound all year, trading between lows near $20 and highs near $27. Comcast has been able to improve its performance over the previous year but still fell short of expectations. Third quarter revenues were up by 50%, but included acquisitions not part of organic growth. The earnings for the period were up 6.5% to $.33 per share.
Amgen (AMGN) is the bright spot of this group. AMGN is trending up with a strong bounce off the 30 day moving average. Momentum is strong and indicates a continuation of the trend. Currently trading around $64 with a p/e of 12.7, AMGN has room to go up. AMGN has institutional ownership over 80% and pays a dividend yielding 2.25%. Earnings for the third quarter of 2011 were good, with revenue and eps up 3% each. Amgen's board of directors authorized a $10 billion share repurchase, accelerating the repurchase program already in place. Amgen raised guidance for the fourth quarter and the entire year. The sales of Amgen products rose 13% in the quarter, outpacing the 11% rise in operating costs. The sales for 2012 are also expected to rise based on wider regulatory approval for its drug therapies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
