S&P Trading Range 'Til April - Cook`s Kitchen
January 25 2012 - 7:00PM
Zacks
The market has staged a remarkable recovery from the depths of
recession fears and European worries in the second half of 2011.
Ever since the reversal bottom in October, I have been trading the
swings higher calling for S&P 1,350 in the first quarter. And
the question I have kept asking is this...
"As long as earnings are meeting expectations in
the aggregate, and the European problem is stable, why can't the
market keep going higher?"
Look at a few of the positive forces...
Exceptionally low interest rates
Global growth moderating, but not recessionary
Valuations and market multiples attractive in the
low teens
Europe apparently able and willing to prevent
financial collapse
China ready to re-stimulate their economy after
slowing the pace a bit
Fund managers deploying cash and afraid to miss the
upside
Plenty of bears (and bulls) doubt the rally right
now, and that is fuel for upside
"Bulldozing the Recession, Excavating the
Boom"
Need proof that the global economy is humming
along? Look no further than Caterpillar (CAT) earnings. In
2009 and 2010, I followed the conference calls with CEO Jim Owens
and the current chief Doug Oberhelman religiously. Why?
Because they were so tied to emerging markets
growth, and their development of manufacturing and sales facilities
in China gave them as clear a read as anyone what was going on.
Thus the title in quotes above that I used more than once to
describe CAT's resurgence from the 2008 recession.
After CAT's blow-out earnings in 3Q2011, Oberhelman
talked about why the China slowdown was such a good thing because
it was preventing a bubble (and subsequent burst) that would hurt
the slow and steady 10-20% growth they were seeing in revenue and
earnings.
In short, if you want to know about China's
economy, listen to CAT. Sure, there are good arguments about how
they are merely building "ghost cities" and "bridges to nowhere."
But, Chinese leaders and economic planners know they've got to keep
more than a few hundred million people happily employed. They will
likely maintain 8+% growth and CAT is a big part of that.
One last point about CAT before we look at the
S&P chart. I did not listen to today's conference call yet so I
don't know how good their outlook is for the States. But, with the
recent strong housing data confirming a healthy bottoming process,
CAT will likely be growing again here.
Plus, look at the machinery and power equipment
needed for America's exploding oil and gas exploration projects.
This is another domestic growth area for CAT.
We will get hiccups there in the 30% growth of
"fracking," especially after the earnings miss story we got from
Carbo Ceramics (CRR) today. But it looks like their problems
are company-specific since they were overly focused on dry gas
extraction and not the high-demand areas with natural gas liquids
(NGLs).
Since I own and trade many stocks in this field,
including Kodiak Oil & Gas (KOG), Flotek (FTK),
and EOG Resources (EOG), I have some more homework to do here.
The View from the S&P Weekly Chart
Okay, let's talk about why all this still doesn't
mean the market should go higher, and why or why not.
Yes, the market may be "over-extended" by many
technical measures. But I believe that those calling for a
correction (10% or more downside) are likely to be as disappointed
as those who think we will surge through S&P 1,350 soon. I
think the chart argues for a sideways trading range now between
1,250 and 1,350.
The likely resistance up top is formed by the
head-and-shoulders top we formed in the first half of last year.
Unless the global economy suddenly starts growing at greater than
4%, getting through there will take many tries.
And the likely support down below at 1,250 is
formed by lots of healthy price action that happened in the fourth
quarter to get us through there. This is a weekly chart where I
converted your standard 50 and 200-day moving averages to their 10
and 40-week equivalents. There will be support where they just
crossed positive around 1,255.
I am looking for one more surge higher in the next
week to really test 1,340-50. I would lighten up some of my longs
there and then look for better bargains on the ensuing
sell-off.
Maybe it won't be this easy and the selling will
start sooner, say after Friday's GDP data. Either way, I think we
can confidently trade the range between here and there till
April.
Kevin Cook is a Senior Stock Strategist with
Zacks.com
CATERPILLAR INC (CAT): Free Stock Analysis Report
CARBO CERAMICS (CRR): Free Stock Analysis Report
EOG RES INC (EOG): Free Stock Analysis Report
FLOTEK INDU INC (FTK): Free Stock Analysis Report
KODIAK OIL&GAS (KOG): Free Stock Analysis Report
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