Saturday, May 3, 2008

The Psychology in the Upcoming Week's Economic & Earnings Data

Weekend greetings to one and all across the U.S. and throughout the world! Congratulations to all bulls as the S&P closed above that 1,400 resistance we predicted in our last weekend piece. We are now privileged to offer you our week ahead insights.

We look forward to Monday, May 5th and the Microsoft/Yahoo drama. MSFT cannot afford to shuffle their feet much longer, they must pay up in order to compete against the Google juggernaut. A story just hitting the wires claims MSFT has withdrawn their offer of $33, while YHOO was looking for $37. This deal is far from over. We suggest taking advantage of the volatility in YHOO come Monday, buying on any dips as a hostile take over could occur.

At 10:00 ET, the Institute for Supply Management (ISM) data is released.
This indicator is related to non-manufacturing, but since the U.S. has increasingly become a service driven economy, we don't believe it should be discounted. The "service index" quizzes purchasing managers in nearly 400 companies about their current sentiment on factors such as incoming orders, backlogs, inventories, jobs, prices paid, and whether the orders were domestic or foreign. The managers don't give specific numbers, simply a response of good, bad or neutral. POTC will pay close attention to the prices paid component that will be the market moving data point in our opinion. The last release in April revealed the prices paid component at 70.8 and Bulls don’t want that component rise. (Only once has that component crossed 75.)

Be careful: with energy prices at all time highs, the prices paid component won't come in light and if it does come in north of 72, the bears will wake up and put out many camp fires. We urge caution at 10 ET after the ISM is released. The market will be VERY BORING from 7:30 ET to 10 ET in anticipation of the data. Our readers would be wise to sell ahead of this data, as you have a window of 1 1/2 hours after market open. POTC sees the market selling off after the talking heads begin throwing around the ugly word INFLATION due to the likely rise in the prices paid component.

Earnings after the market Monday come from Cleveland Cliffs Inc. (CLF) and Forest Oil Corp. (FST). These are two energy companies erroneously looked upon by many consumers as the "bad guys", a cause of the rising prices paid component in the ISM. CLF's and FST's strong earnings will add more fuel to the hawkish and bearish inflation argument. But how quickly things will change come Wednesday… caution to all inflation hawks, bears, and conspiracy theorists alike; crude oil inventories will cause these animals to rethink their hyper negative sentiment.

We look forward to a ‘naked’ Tuesday, May 6th (NO economic releases scheduled). "Trend Setting Tuesday", as old Wall Streeters refer to it often sets the tone for the entire week. Perhaps the lower close on Monday will influence Tuesday's trading, as no market moving earnings releases are scheduled before the open. BUT, POTC sees Tuesday's morning and intraday sell-off being erased by a closing rally! POTC feels the stock market rally will have reflected the good earnings and guidance after market close from Cisco Systems Inc.(CSCO). Please click on the live CC link in the left margin to hear one of the most highly regarded CEOs to ever lead a publicly traded company. The legend that is John Chambers is taken very seriously when he speaks. His optimism and honesty with regard to macro economic trends usually translates to market rallies. Be careful as a result when setting up your trades for Wednesday; a bullish bent would be wise.

We look forward to Wednesday, May 7th with Crude Oil Inventories scheduled for release at 10:30 ET. Oil was up $3.80 last week, and closed Friday at $116.32

Dennis Gartman feels the run in many commodities is over in the short term (3-6 months), as he divulged on CNBC recently. So if we do see a greater than expected build in Crude Oil inventories, we will see the oil trade unwind perhaps below $110.00 this week. Anything below $110.00 would scare the inflation hawks and bears away and give bulls a reason to celebrate and relax by their camp fire. POTC believes that since crude oil failed to break through $120.00 in this incredible run oil could break $100.00 by months end unless there is a geo-political event with Iran.

No market moving earnings are scheduled before market open Wednesday, so perhaps CSCO's great earnings and guidance after market close, coupled with crude oil falling below $110.00 could cause a market rally that few might expect. Please set up your trades accordingly, whether you agree or disagree with our bullish analysis. Any of you daring souls who would care to predict where the S&P will close on May 9th are welcome, asked, requested, even challenged to vote in our Poll in the left margin!

We look forward to a ‘naked’ Thursday, May 8th. POTC feels the smart trade will continue to be long technology after CSCO's tide raises most of the technology universe. We always stress that you look at the "stock market" more as a "market of stocks", so when the tide raises all ships/stocks on account of CSCO you have the opportunity to enter short positions in failed stocks (just as GRMN played out). We continue to see JRJC to be a great short candidate into their May CC.

Solid companies like Intel Inc. (INTC) and Google (GOOG) will continue their runs. We see the MSFT/YHOO distraction as an opportunity for Google to innovate beyond what most analysts are factoring in to their growth models. Google is well aware that even if MSFT were to bid up YHOO's price, the buy out is not guaranteed. MANY anti trust arguments would begin to swirl. Remember, since Google didn't spend a penny on the wireless spectrum auction a few months back, they have over $12B in cash on their balance sheet to drag the MSFT/YHOO anti trust issue through the courts. Google is a juggernaut must-own company in our opinion.
Earnings after market come from Inc. (PCLN). You can find the live CC link in the left margin.

We look forward to Friday, May 9th at 8:30 ET for the Trade Balance to be released:
The U.S. imports more goods and services than they export. This data is released for two months prior, so Friday's release covers the months of March and April. Economists look at the trade balance to gauge strength or weakness in world economies as well as the U.S. It would be bullish if both imports and exports were to expand, but even more ideal if the import/export gap began to shrink. POTC continues to believe the strength in foreign currencies, particularly the Euro-dollar will act as a fire starter by the time the leaves turn in Fall 2008.
And for the last very important forward-looking psychology nugget: take profits on Friday, as Monday, May 12th is very naked, bringing NO market moving economic data or market moving earnings releases. Usually Mondays in May are slow and boring, especially when they are void of economic and earnings data, so set your trades up accordingly.

Please don't forget to vote in our S&P poll.
The Psychology of the Call Team.

1 comment:

Anonymous said...

I agree with your 'csco' analysis