Earnings Season ETFs: Tech and Transports

Here in "earnings season," about 70 of the companies in the S&P 500 have reported their Q1 profits. If those companies were a representative sample of the entire bunch, one would have serious reservations about the market's near-term prospects.

Specifically, analysts expected that declining profits were supposed to be in the neighborhood of 12%-13% across the entire S&P 500. Yet Bloomberg recently reported that the profit slump of the corporations that have reported so far is in the neighborhood of 26%.

Twice the decline in profits? That's going to significantly hit the profits/earnings in the earnings component of P/E. Indeed, many fundamental analysts argue that the market can't be considered undervalued if earnings are falling faster than prices.

And yet, the S&P 500 is up nearly 10% off of the lows of March. How can this be?

For starters, the first 70 companies to report results represent a disproportionate number of financial companies. Their profit declines have not only been anticipated, but the prices of their stocks have already been obliterated. (Any signs of hope for a financial system to get better down the road is being embraced... losses, not profits, be damned!)

Secondly, when earnings of S&P 500 companies soared at a double-digit pace during the economic expansion, the prices of stocks did not move as highly as they might have. It follows that, even with a 4 1/2- 5 year bull market, P/E ratios were actually declining.

Third, investors are far less concerned about present P/E ratios and far more focused on future prospects. Caterpillar (CAT), Google (GOOG), J&J (JNJ), IBM (IBM), Intel (INTC) and others are maintaining guidance that is relatively upbeat for the remainder of 2008, giving hope that the "E" for the rest of the economy will be far better in the future than it is today.

So is the market embracing good news and ignoring bad news at the moment? Yep. But that's not much different than when... over the last 6 months.. the market completely disregarded any positive info while deferring to doomsday scenarios.

After one of the most abysmal quarters (Q1 2008) for stocks in recent memory, "snapbacks" are not unusual. And there's little doubt that bears will be looking for ways to shut down the upswing soon.

The question, of course, is where might you get the best bang for your ailing buck?

If one group appears to have been beaten up mercilessly... more so speculative fear than actual results... it has been technology. The bellwethers in the iShares Dow Jones Tech Fund (IYW) are cash-rich. They make enormous amounts of money from overseas operations. The current P/Es and the historical P/Es are exceptionally attractive. And you've got a breakout above the 50-day trendline.

Another area that I described as a barometer for U.S. stocks going forward, is the "transportation" arena. What's more, I put the iShares Dow Jones Transportation Fund (IYT) and the iShares Dow Jones Technology Fund (IYW) on my "hit list" for an eventual economic recovery.

Rail and sea prospects for the delivery of goods look strong. Granted, high oil prices may make it hard for air and trucking. Then again, stocks rise in anticipation of a future recovery.

At the very bottom of the market's lows on March 10, I explained that the iShares Dow Jones Transportation Fund (IYT) would tell us when stocks will get better. Then, IYT had closed at 79. Five weeks later, it figures to close 15% higher near 91 and north of its 200-day trendline.