Things Are Looking Up

We seem to be two for two on significant companies beating earnings by a wide margin as the main part of earnings season kicks off. With GS posting 4.93 and record revenue, and INTC posting .17 cents and raising Q3 guidance, that is the type of thing that will send this market higher. The question now becomes is this the exception or the norm?

We finished right at the 905 level which in my opinion is still a possible head fake, however after Intel's results we saw S&P futures jump 10 points to 911 which should translate to a 915 cash market open if we hold overnight. That type of action definitely points to higher prices in the short term. If the financials can keep surprising to the upside this could very well take us back to 950 and beyond.

The more traditional bank results will likely hold the key. When I say more traditional I mean companies that are true bank holding companies like US Bank, Wellsfargo, not hedge funds in disguise like Goldman and Morgan. If the other major financial players can earn money without the help of proprietary algorithm program trading that essentially guarantees money to companies like GS, then I think this rally could continue.

My view on the fundamentals will not change, I still think unemployment will go higher and likely top out close to the 11% level (at least the way they measure it). This will definitely weigh on consumer spending and further depress housing prices. Once we get into a less favorable housing season I think it could get decently worse and commercial real estate may start to deteriorate further. The funny thing is that GS reported a fairly high write down related to commercial real estate yet the IYR was up today.

So if I am still not that optimistic on the economy how can I think we go up from here? Well for one the technicals are in favor of a move higher. The break back above 900 will be seen as bullish by traders and we get that self fulfilling prophecy. The other thing is that if companies report better than expected earnings, even if those expectations are low, the market psychology will likely once again want to buy stocks. There is somewhat a disconnect between some businesses and the actual real economy. The job losses we are seeing are coming from the very companies who are reporting. While it is definitely unfortunate for the workers who are laid off, this does reduce expenses making the companies operate in a more efficient(aka less expensive) manner.

So in the short term the pain in the real economy could help support corporate earnings surprises which are statistically responsible for a majority of stock price appreciation. Even though I do think poor economic fundamentals will eventually catch up to most companies, I am not opposed to the possibility of a near term rally. Sadly, only profits seem to matter and if that is what the market is looking for then we could be setting up for a decent move higher. I am not willing to take too many positions just yet though. I will likely do nothing for the rest of this week unless I need to cut losses, and then if things still seem good going into next week I may take on some new risk in good looking stocks.

Oil continues to frustrate but it looks like the make or break point could come with tomorrow inventories. In the recent past, it seems to be that if we sell off ahead of inventories we get a rally on their release and vice versa. So the recent price action could be setting up for a rally especially on bullish numbers but of course you never know. USO is obviously a fairly inferior trading vehicle as it hasn't even properly tracked oil this year which is why I do not plan to hold it for very long.

One of the definite lessons from this market is that you don't necessarily have to agree with what is happening but as long as you manage risk properly you may as well go along for the ride. Market psychology is emotion based which allows for the exploitation of inefficiencies for possibly better than average risk adjusted returns.

We'll see what unfolds in the days to come. I would actually be curious to go back and see if the majority of first week of earnings releases beat expectations, then do we generally rally regardless of the remaining releases?

Total Return for 2009: 151%