Smart Investing/Trading for the week ending April 18 2008

US Markets Weekly Update and Outlook

Stocks face more earnings with newfound optimism
Friday rally leads market to top its February highs; Apple, BofA results on tap

MarketWatch: U.S. stocks will enter the coming week with newfound optimism, after a spate of quarterly results from ailing financial firms failed to spook jaded investors, while upbeat earnings at technology and multinational companies soothed concerns about global growth. A week ago, the market was shocked by General Electric Co. as a surprise loss at the stalwart international conglomerate fueled fear that global growth wouldn't be enough to overcome the impact of the credit crisis and of a U.S. recession on profits. But over the past week, "we've gotten better than expected earnings results from the likes of JP Morgan, IBM, United Technologies, Honeywell, and of course Google," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "These results have completed trumped last Friday's negative earnings report by GE," he said. "I think what we're seeing is an alleviation of some of the fears that the slowing economy would drag down corporate earnings."

Spring rally

The Dow Jones Industrial Average surged 228 points, or 1.8%, to 12,849, topping its Feb. 1 intraday high of 12,841. For the week, the Dow advanced 4.3%. The S&P 500 index gained 24 points, or 1.8%, to 1,390, advancing 4.3% for the week. The Nasdaq Composite rose 61 points, or 2.6%, to 2,402, surging a whopping 4.9% on the week.

Global growth and global risk

The market also received strong support from upbeat results at equipment-maker Caterpillar Inc. and fellow industrial firm Honeywell Inc. , both of which derive most of their revenue overseas. "We're getting strong results from companies that have a bigger exposure internationally and don't have the same financial exposure that GE has," Nolte said. In other sign of confidence about global growth, a firmer dollar and a drop in commodities prices Friday failed to dent investor appetite for the shares of companies in the materials sector of the S&P. Meanwhile, crude oil prices surged well past the $116 a barrel mark, and even touched $117 in after-hours trading amid supply disruptions in Nigeria. But while all seemed rosy for profits over the past week, the sustained surge in commodities prices, including for food, is adding to concerns about consumption and the economy down the line. "Many have been calling for a softening U.S. economy to undercut strong commodity prices," said Doug Porter, chief economist at BMO Capital Markets, in a note. "It's increasingly looking like those tables have been turned--persistently strong commodities are threatening to further undercut a struggling U.S. economy." Yet for the moment, "a sense that the worst may be over on the credit crisis front is gradually rolling over the market," Porter said. Setting aside last week, stocks have been on an uptrend since mid-March, ever since the near-collapse and subsequent bailout of investment firm Bear Stearns Cos. led the market to hope the worst of the credit crisis is behind.

Biggest week of earnings season

Next week, investors will brace for 157 earnings reports from S&P 500 companies, marking the busiest week for the first-quarter reporting season. Earnings at S&P 500 firms are now forecast to have dropped 14.6% from the year earlier quarter, slightly worse than expectations for a 14.1% drop last week, according to Thomson Financial. "It looks like we'll have our third straight quarter of negative earnings growth, which we haven't seen happen since 2001," said John Butters, an earnings analyst at Thomson. The outlook for the second quarter has also worsened, with earnings now expected to fall 4% in the quarter compared with a drop of 3.2% last week. But with much of the pain coming from financials, and much of it already expected by the market, investors will again turn to results that may point to global resilience. "We have a much broader array of companies reporting next week, with many firms across all the sectors," Butters said.

Proof in the earnings, data pudding

"The market is now betting that we'll have a short and relatively shallow economic slowdown, which would allow earnings to come back relatively quickly," said Hinsdale's Nolte. "But that feeling may only last one week."
Besides the flood of earnings, more economic data awaits investors next week, namely new and existing home sales for March, along with March orders for durable goods, weekly jobless claims, and the Michigan consumer sentiment survey. "Durable goods orders will give us an idea of the impact of the housing slump on consumption and the economy," Nolte said. "These orders had popped higher during the housing boom."

Weekly KLSE Update and Outlook

I Capital: The KLSE CI is above its 30-day but below its 50-day and 50-week moving averages. Both its daily MACD and DMI are bullish. This week's I Cap updates the daily Plantation Index. The mild rebound mirrors the Plantation Index recovery. The bullish daily MACD has improved further while the DMI has just turned bullish after being bearish for one month. Meanwhile, the weekly MACD and DMI are turning flat, indicating that the consolidation phase may last a while more. Still, the energy stocks and commodities remain favourable as investors remained concerned over the US and European credit markets.

* Picture above is Robert Mugabe, President of Zimbabwe since its independence. Will he be able to hold on to power despite "unconfirmed results" and "yet to be released results" show that he has lost the election? What is fair and square to us? Can we square a circle or wrong a right?