Amid mixed results, debate rages

4/21/2008


Stocks have been choppy, with early March-quarter earnings reports providing ammunition for both bears and bulls. The Dow Industrials are within 150 points of the Feb. 1 high of 12,743.19, so the near-term reaction to earnings news is crucial.

A close above 12,743.19 would return the Dow Theory to the bullish camp — and bring our recommended cash position to a range of 15% to 20%. For now, with the Dow Theory still in the bearish camp, subscribers should keep 25% to 35% of equity portfolios in a money-market or short-term bond fund.

Profit reports
Earnings season began with mixed results, as disappointments from General Electric ($32; NYSE: GE) and Wachovia ($25; NYSE: WB) were countered by solid results from Wells Fargo ($28; NYSE: WFC), IBM ($117; NYSE: IBM), Intel ($22; NASDAQ: INTC), and CSX ($60; NYSE: CSX).

Bears argue GE’s shortfall is evidence that problems in the credit markets are spreading, while bulls point to GE’s continued strength in infrastructure sales. As always, it is the market’s reaction that reveals whether earnings have met expectations, and there is no denying that GE undermined the bullish case.

After a sharp one-day decline, however, the averages have gained support, partly on strong results from economically sensitive companies. Particularly noteworthy is the surge in the railroad group, which has helped the Dow Transports reach new highs for 2008.

While the Transports were already in an uptrend, the group’s positive share-price reaction supports the bulls’ argument that earnings outside the financial sector are healthy. For the S&P 500 Index, Thomson Financial says consensus estimates project overall March-quarter earnings will be down 14.1% from the year-earlier period — but up 6.4% excluding financials.

For the S&P MidCap 400 and S&P SmallCap 600 indexes, consensus profit estimates have dipped only slightly from peak levels. Both indexes have outperformed the large-company S&P 500 Index over the past three months. Historically, shares of smaller companies have underperformed when expectations for the economy are deteriorating.

What to do
Watch the averages while looking for opportunities one stock at a time. Qualcomm ($41; NASDAQ: QCOM), a new addition to the Buy List and Long-Term Buy List, represents an attractive pick. With a near-term close in the Industrials above 12,743.19, our target weights will increase to 3.0% for the 28 stocks on our Buy List and 2.5% for the 34 stocks on our Long-Term Buy List.


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