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The Earnings Scorecard 1/26/14 & The Equity Market

Jan. 25, 2014 11:40 AM ETMU, SPY5 Comments
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Portfolio Strategy, Long/Short Equity, Dividend Investing, Special Situations

Seeking Alpha Analyst Since 2010

INDEPENDENT Financial Adviser / Professional Investor- with over 35 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice, and Experience to produce Portfolios focused on achieving positive returns. Last year I launched my Marketplace Service, "The SAVVY Investor", and it's been well received with positive reviews. I've been part of the SA family since 2013 and correctly called the bull market for over 8+ years now. 

MORE IMPORTANTLY, I recognized the change to the BEAR MARKET trend in February '22. 

Since then investors that followed my NEW ERA investment strategy have been able to survive and profit in this BEAR market. Winning advice that is well documented, helping investors to avoid the pitfalls and traps that wreak havoc on a portfolio with a focus on Income and Capital Preservation.

I manage the capital of only a handful of families and I see it as my number one job to protect their financial security. They don’t pay me to sell them investment products, beat an index, abandon true investing for mindless diversification or follow the Wall Street lemmings down the primrose path. I manage their money exactly as I manage my own so I don’t take any risk at all unless I strongly believe it is worth taking. I invite you to join the family of satisfied members and join the "SAVVY Investor".

Earnings statistics from recent research reports:

Of the 121 companies that have released earnings since the Q4 2013 reporting period began, 68% have beaten bottom-line EPS estimates. Below is a chart of the earnings beat rate on a quarterly basis going back to 2001. As you can see, 68% would be a strong reading if it holds. So far this season, companies have done a pretty good job of posting better than expected EPS numbers. Keep in mind that it's still very early, though. More than 1,000 companies are set to report over the next few weeks, so the beat rate could fluctuate a lot.

Looking around for value, I continue to come back to two of my favorite sectors..

Tech and Energy remain the two most inexpensive sectors vs. history on relative forward P/E basis, with all of their component industries offering implied upside vs. historical average multiples. I expect that as global growth picks up over the next several quarters, multiples should expand for these sectors. We saw evidence of this in December, as all six cyclical sectors in the S&P 5000 saw their forward P/Es expand, led by Tech and Industrials.

Earnings on Thursday & Friday continued somewhat positive , Large caps like (MSFT) (UTX) (SWK) (VZ) (JNJ) , in the Tech arena , (JNPR) , my holdings (FFIV) (EBAY), (GE) didn't disappoint.

The overall market action has me scratching my head.. Not the fact that we have had weakness in the price action, but the divergence between the major indexes is intriguing. Yes we had the "china" sell off on Thursday but the Dow Transports were rocketing ahead making a new high on the same day the Dow lost 175 points ! The S & P is still just 3% below its all time high, but the index "gapped" lower on Friday on more 'worries" on China , Emerging Markets currency issues , et al,, and the market sell off continued into the close with the S & P now standing at 1790. Forget that "noise" the equity market needed an "excuse" to sell off and these are the convenient headlines that are filling that bill. Friday's action saw "red" everywhere, but as long as those small-caps keep hanging tough, I don't think Friday's drop is anything more than a brief pullback. Don't forget, that on Wednesday, right before the weakness began, the Russell 2000 Index closed at an all-time high and the Nasdaq Composite made a new 13-year high. Lastly, housing held up very well as yields took a big dive lower.

The laggard, the beleaguered Dow 30 , which is underperforming the other averages has not confirmed the recent highs being made by the Transports.. and that has me a bit troubled..

Corrections , pullbacks are healthy for Bull markets , and have stated that many times with the latest commentary as posted here (Jan 4), when I first took a look at the upcoming earnings picture :


That post also indicated that if the markets should continue the March higher without a pause the resulting correction when it does come will be more severe. My quote from that missive "the question is exactly how we get to those new highs. From a technical viewpoint a retest of the S & P 1550- 1560 breakout area may well be in the cards as the adage of "what was resistance , now becomes support" is clearly shown here.. The 64,000 question is when...."

At the time I penned that , it was my "worst" case scenario. Keep in mind a drop to that level will be a 15% drop from the highs, Of course, IF there is a 10-15% pullback the headlines will read Armageddon is here again. However disruptive, it will not alter the Long term secular bull trend that I still see in place.

Well, perhaps that scenario has started , or is it just another 5-7% pullback ? The answer to that question will be played out in the coming days /weeks.. Picking a "top" in the market or the "bottom" of a correction is "elusive". My take , we could get a much better feel for this sell-off after next week is in the books. The markets are a dynamic situation, maintaining flexibility to the changing landscape is imperative..

I have stated "over & over" here in this blog , raising cash , booking profits along the way, selling calls against positions is prudent. Now with a dividend stream from a core portfolio still in place, there are funds to select fundamentally sound companies that will be tossed aside with the same gusto as the overvalued high flyers. As an example,the fundamentals of a name like (MU) haven't changed since their last earnings report that was fantastic. I added this name last week, it has the potential to earn $3-$3.50 this year and is selling @ 22-23. The stock barely budged during the S & P's 2.6% loss this week.. A sign of strength... First target 30...

The S & P sell off blew right thru the first line of support around the 1813 - 1815 area , and the swiftness of that move can't be ignored.. Right now , I 'm looking at the 1760-1770 level on the S & P as the next line of support.. A drop below that level will cause me to revisit my thought on the 'worst case " scenario I mentioned above..But, no need to get ahead of ourselves with this technical analysis just yet . Lets see what the markets do next week..

All of this is a "speedbump" for the LT investor and many don't need to do anything here.

As my Portfolio holdings listed here in the blog state


I have a portion of my funds allocated to what I call "intermediate " holdings (usually 6 months - year). Specific situations that present themselves from time to time .. This is the area along with my call writing portfolio (Latest installment can be seen here)


that will now get the most attention . Picking spots to add income to the "core" holdings...

Stay the course -- No need for panic...

Best of luck to all !

Disclosure: I am long MU.

Additional disclosure: I am long numerous equity positions here - all of which can be seen here..

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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