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Market Conditions and Recommendations 2015 04 27

Updated on April 28, 2015

Overall Market/Indexes:

The S&P (2,118) and the DOW (18,080) both are trading above their 20 and 50 Day Moving Averages. Bother were up for the week and the S&P is testing new highs, while the DOW is within 1 ½% of it’s high.

Both the S&P and the DOW have formed wedges on their daily charts. We are still waiting for a break out (Above 2,120 or Below 2,039 on the S&P and Above 18,200 or Below 17,580 on the DOW). Volume has been light the past week, despite a plethora of large cap stocks reporting earnings last week.

Ratio of PUT premiums to CALL premiums (0.70 now vs. 0.83 last week) indicate option traders are pricing in slightly more risk to the upside (ie. expect prices to rise).

P/E Ratio for the DOW is at 16.8.

Price-to-Book Value of DOW is at 5.17.

P/E ratio and Price-to-Book Value of DOW are both near 12 month highs. Key would be whether earnings can continue to support these valuations. Any indication of a slowdown in earnings will have an outsized negative impact on the market.

News/Commodities:

Oil is at $56.95 and has been trending higher for since mid-March, but between $56 and $58 the past week.

Durable Goods Orders came in better than expected (4.0% vs. 0.6%). However, that was due largely to orders for airplanes. Durable Goods Orders excluding Transportation declined 0.2% vs. 0.3% expected growth.

Economic News/Events:

Consumer Confidence (APR) gets reported TUE.

GDP (Q1- First Report) gets reported WED. Expected 1.1% Annual Growth.

FED Reports Interest Rate Decision reported WED.

ISM Manufacturing PMI (APR) gets reported FRI.

Earnings:

Earnings this week:

AAPL - Mon Apr 27

CELG – THURS Apr 30

XOM – Thurs Apr 30

ABC – Thurs Apr 30

V – Thurs Apr 30

SWKS – Thurs Apr 30

Through last week, 201 of the S&P 500 had reported earnings. The combined results were: Profits declined 2.8%. If this continues, this will be the 1st decline in earnings since Q3 2012. So far 73% of companies beat estimates. This is an early indicator that earnings estimates have been lowered significantly, which may lessen downside risk for now. However, 26 companies have lowered their guidance vs. 13 companies that have raised their guidance.

More than half of the S&P 500 companies that have reported have reported Sales below estimates. This is likely a combination of 2 factors: slowdown in global economy and strengthening of the US Dollar.

Despite the above, indexes are marching higher. However, they have done so on light volume.

Summary of earnings reports available from FactSet Earnings Insight:

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_4.24.15

OVERALL SUMMARY:

Slowing GDP growth (Durable Goods Orders, strengthening dollar, geopolitical tensions, etc…) could begin taking a toll on earnings (see Earnings Section above). Volume remains light – which shows that there is little conviction in the market. This could lead to fickle markets (ones that react to news and bounce around – increased volatility).

P/E Valuations don’t look too overvalued in light of earnings. However, any macroeconomic changes that could impact earnings could derail this uptrend and put tremendous downward pressure on the markets. Expectations for earnings and for GDP have been revised lower recently.

Earnings so far are showing that estimates may have been lowered too far. More companies are beating estimates. This may help the markets in the short-term, but continued concern about global economic conditions may have a greater impact on the markets. That estimates have been lowered significantly is seen in the fact that 73% of companies that have reported have beaten earnings estimates, yet only 47% of companies have beaten revenue estimates.

Stock Screening Results:

No stocks appeared in my screens based on volume.

Chart Info/Pattern Recognition on Screening Results:

No stocks appeared in my selection screens.

Chart Info/Pattern Recognition alone (OptionsXpress – Lg Cap, Above $50, Short-Term Horizon):

No Lg Cap Stocks above $50 with avg daily volume above 1 million shares appeared in this screen.

Technical Analysis: (Currently doing several technical evaluations for 16 Lg Cap Stocks)

SUMMARY: None of the technicals (other than AXP which is now retreating after it’s earnings announcement) are giving any clear direction.

Recommendations (Looking for 50% gain on option value):

AAPL CALL MAY $135 – Stock at $132.84. Current Option Price $3.20 (AAPL reports earnings 4/27. I expect another strong quarter from iPhone sales, especially with sales growth in China so strong).

Previous Recommendations Open (Closed - Removed from list: 6 Success, 4 Fails):

4/21/2015 AAPL $126.91 at time. CALL MAY $130 was $2.62. Option traded at $5.80 on Apr 27. **SUCCESS

4/5/2015 MSFT $40.29 at time. PUT MAY $40 was $1.18. MSFT now at $47.62. PUT MAY $40 is now at $0.05.

4/5/2015 XOM $84.30 at time. PUT MAY $85 was $2.81. XOM now at $87.01. PUT MAY $85 is now at $0.95.

3/28/15 BA $148.85 at time. PUT MAY $150 was $5.90. BA now at $148.24. PUT MAY $150 is now at $4.00.

3/28/15 MSFT $40.97 at the time. PUT MAY $41 was $1.33. MSFT now at $47.62. PUT MAY $41 is now at $0.10.

3/28/15 XOM $83.58 at the time. PUT MAY $85 was 3.41. XOM now at $87.01. PUT MAY $85 is now at $0.95.

Conclusion:

Overall volume remains muted, which means that investors are waiting for a signal to either jump in or get out of stocks. Because stocks have been trading in a range, many of the technical indicators I track aren’t giving a clear direction. Earnings is giving some momentum for individual companies, but not the broader market.

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