Author Archive for Dan Stewart

Making Market Clarity – May 21, 2013

Apple Pays No Tax on Much of Its Overseas Income, Senate Panel Finds. Wow, first Google, now Apple.

Loopholes allowed Apple (AAPL) to avoid $44B in U.S. taxes from 2009-2012, claims a Senate as they slam Apple.

Japan Upgrades its Economic Outlook. But it will be short lived. Give it less than 2 years.

IMF Predicts Cyprus to return to Growth by 2015. Won’t happen! And these economist have been consistently wrong, so if you were a betting man/woman, you would bet against this prediction.

High Frequency Trading a Challenge for Regulators, and regulators are worried they won’t be able to keep up. My questions is, When Have They? (Kept Up)

Buyers Back in Quick Turnaround, But Will It Last

Buyers came back with a vengeance Friday after the University of Michigan Consumer Confidence number came in better than expected as did Leading Indicators. This gave the markets a warm fuzzy.

The markets had originally sold off Thursday afternoon after comments by San Francisco FED President John Williams as well as Obama getting attacked with tough questions in the Rose Garden. Frisco FED President Williams said the FED should reduce asset purchases “perhaps as early as this summer.”

This spooked the markets. But on further examination in the body of his statement, he went on to say this would depend on conditions remaining stable and jobs improving. So for now, QE is a safe bet.

The major indices were up between .8% to 1% Friday. The small and midcap also participated in the rally, and the Dow Jones Transportation Average was up 1.26%. These are bullish signs.

Total Volume was light on the NYSE and average of the NASDAQ. Up Volume was 76% on the NYSE and 74% on the NASDAQ. Advancing issues were 69% and 67% respectively. So breadth was positive, but buying was mediocre even with the productive price gains. It was not a “blowoff top.”

The short term is questionable, but the midterm is intact. The big question is do we have the fundamentals for a long term, bull market. I am going to examine each of these time frames with the long term first.

Over the long term, earnings expectations drive stock prices. As of Friday, 465 companies reported their 1st Quarter earnings. Earnings are up 2.8% YoY (year over year), and 65% of the companies beat expectations on earnings.

But revenues are down -1% with only 42% of companies beating revenue expectations. This means margins are getting squeezed and the trend of expanding earnings and revenues is reversing. Unless we get some real growth and expansion in the economy, the bull market will come to an end.

The midterm techincals are still solid. Buying has been expanding while supply has been contracting. As long as sellers aren’t out in force, you can have a pullback, but you cannot have a bear market. The way to know if the market changes character is to monitor the ratio between buying and selling volume, with extra attention to selling volume.

The short term is more difficult, especially as we are in uncharted territory with the exception of the NASDAQ. So support and resistance are no good as are other technical indicators. I have attached 2 DOW graphs, a DOW 1 Year & a YTD close-up, so you can see how the DOW is above its 10 day moving average (10DMA) and way above the trendline. So it is high by any standard (see John Sheely’s article regarding average true range or ATR) .

DOW 1 Yr Above Its 10 DMA & Trendline

DOW YTD Above Its 10 DMA & Trendline

You will need to rely on price/volume action and the selling volumes mentioned above. And we have been “overbought” for weeks now. So probabilities suggest a pullback. But it will not be a bear market.

And historically, the DOW has experienced its longest run without 3 consecutive down days in over 100 years. And we have had a steep increase the past 2 weeks. Risk is definitely elevated and that is why I took my most aggressive position, the ProShares Ultra S&P 500 (SSO) off the table Thursday afternoon.

Now I have approximately 20% cash. I will continue to sell positions raising more cash if selling accelerates. But for now it about managing risk – avoiding losses and protecting profits – than making gains.

I also have a “sub” manager who is the top rated long/short fund in the country managing approximately 15% of the portfolio. He is an exceptional stock picker on the long and short side, and is 80% long and 20% short at all times. Selling short individual stocks is an art, and this guy has it.

This is another way of managing risk while being able to participate in market gains in a high risk environment. It is a hedged position that has been working very well.

On a side note, a story is breaking out of England that Google (GOOG) may have used suspect tax strategies to avoid paying hundreds of millions of tax in England over the years. If you own Google, you may want to take some off of the table or at least put a stop loss under the stock.

We have 9 companies reporting earnings today including 2 S&P 500 companies. Economic reports are light with only the Chicago FED National Activity Index.

If you have any questions, e-mail me at and I will be happy to respond.

Dan Stewart CFA®

NorAm Asset Management

Economic Reports Today:

Chicago FED National Activity Index

Some Notable Earnings Reports Today:

Campbell Soup (CPB – before market)

Raven Industries (RAVN – before market)

Natus Medical (BABY – before market)

Urban Outfitters (URBN)

hhgregg Inc. (HGG)

Nordic American Tankers (NAT)

TiVo (TIVO – after market)

Germany and France Get an F


Our markets had a strong day Friday on increasing volume on hopes of a European debt solution being reached this weekend. But Sunday, no solution was reached. European leaders stated they were making progress and promised to continue to work toward a solution.

Merkel stated after the meeting “Today, we will not undertake any decisions, but will undertake preparatory work.” Translation…no agreement could be reached.

The fight is over what writedowns the EU banks and private institutions should take on Greek debt and how to recapitalize the banks quickly. Now that the Greek economy has become even worse, Germany wants larger writedowns and more private sector responsibility.

The European leaders said they have ruled out tapping the European Central Bank (ECB) to increase the rescue fund. If they hold this stance, this is not good for the Euro or the European markets. After the Greek banks, many French banks (ex. BNP Paribas and Societe General) and the German banks (ex. Deutsch Bank) have significant exposure (see chart) to Greek sovereign debt.  The 2nd Summit is on Wednesday.

Greek Bank BondholdersGreek Bank Bondholders

In response, the Euro is weaker against the other major currencies. Our equity futures are down.

I hate to say our markets are dependent on a European solution, but they are, especially the financials. This is probably why the FED is throwing around another stimulus plan even though some of the economic indicators are slowly recovering.

Even though the strong showing Friday may lead investors to believe we have bottomed out, the internals tell a different story. Selling has not abated, and has remained strong throughout this rally along with the increase in buying. In fact, over the past few weeks investors have pulled billions out of equity mutual funds. This demonstrates distribution (selling) rather than accumulation (buying).

You should remain cautious and any buying should be selective. In lieu of a stimulus announcement by our FED, earnings are the only thing that could drive our markets higher. Thus far, they have been mixed. Among the companies reporting earnings today are Caterpillar, Texas Instruments and Netflix.

In overnight trading (Sunday 9:00 p.m. CST) the Asian equity markets are in the green. The US dollar is up against the other major currencies. Silver and oil are both up marginally, and gold is down marginally.

Our US equity markets are in the red. The DOW futures are down -35 points, the S&P futures are down -5 points and the NASDAQ futures are down -8 points.