CWS Market Review – January 20, 2012

Huzzahs are in order! The S&P 500 just closed at its highest level in five months. We only need another 4% push to hit a new post-crash high. That’s the odd thing about investing: last year most everyone looked pretty clueless, but this year, suddenly everyone’s a genius. Funny how that happens.

All joking aside, the numbers are pretty impressive. The stock market is off to its best start in 15 years. Consider that the S&P 500 closed higher on seven of the first eight trading days of this year. That’s only happened eight times since 1900. The Nasdaq 100 Index just hit a 10-year high. For the time being, the bulls are in charge and that’s a pleasant change from the tug-of-war market we saw last year.

But what I find most interesting is that 2012 is almost a mirror image of 2011. By that I mean that some of the worst performers from last year are among the best performers this year, and some of last year’s stars are among the also-rans for this year. In more concrete terms, this means that sectors like industrials, homebuilders, materials and financials are finally doing well. On the other side, treasuries are off to their worst start in nine years. I believe this is the result of the market shaking off the worn-out thesis it desperately held on to for several months.

Let me explain this in a little more detail. I’ve recently discussed how the American stock market has been in the process of disentangling itself from the mess in Europe. This is very important and every investor needs to understand what’s happening.

Not very long ago, an investor didn’t even need to look at share prices to see what the U.S. market was doing on any given day. All he or she needed to do was look at the euro. I’m really not exaggerating. But this euro/stock battle isn’t the case anymore. Bloomberg notes that the 30-day correlation between the euro and the S&P 500 dropped from 0.91 in November to 0.66 today. In my opinion that’s still too high, but the message is clear: the old game no longer works.

So what is working? I’m happy to report that our strategy of focusing on high-quality stocks is working very well. As well as the overall market has performed this year, our Buy List has done even better. In fact, we’ve increased our lead this past week.

Through Thursday, the Crossing Wall Street Buy List is up 5.22% for 2012 which is 69 basis points more than the S&P 500. Four of our stocks are already double-digit winners. Ford Motor ($F) is our biggest winner for the year with a gain of 17.19%. I think it may break 20% very soon.

In last week’s CWS Market Review, I focused on JPMorgan Chase’s ($JPM) earnings report. Even though the earnings matched expectations, it was a modestly disappointing report, and Jamie Dimon said as much. The stock took a hit for a few days but here’s the interesting part. Once the selling faded, JPM’s stock quickly regained what it lost and on Thursday it closed at a three-month high. This signals to me that investors are interested in holding on to high-quality stocks even though they’ve become more price-sensitive. Before, investors were primarily interested in holding safe assets and they were prepared to pay any price. I noticed the irony that investors were taking enormous gambles in order to avoid risk. All that jittery volatility is getting pushed out of the market. On Thursday, the Volatility Index ($VIX) closed below 20 for the first time in six months.

Nearly the exact same story as JPMorgan played itself out at Bed Bath & Beyond ($BBBY). Last month, the share price got nicked after the company reporting earnings. What’s frustrating is that I thought it was a decent report. Traders, however, disagreed. Still, once the dust settled some rationality returned to the market and the stock made up lost ground. On Thursday, Bed Bath & Beyond closed at $63.19 which is just 25 cents from an all-time high close.

I had previously told investors not to chase BBBY and instead to wait for a pullback below $60. I think the changing market environment will be good for this stock so I’m raising my buy-below price to $66 per share. (Please note that the buy prices I give are not price targets. They’re merely good entry points. I consider all of the stocks on the Buy List to be good buys.)

The most important story on Wall Street right now is earnings season. The early indications are that it’s not going terribly well. The S&P 500 has topped expectations for the last 11 quarters in a row. I’m not sure we’re going to see #12. In fact, I think it’s very possible that earnings for Q4 will come in below the earnings for Q3.

We’re heading into the peak of earnings season next week and the following week. Not all of our Buy List stocks have said when they’ll report earnings but I do know that next week will be a busy earnings week for us. On Tuesday, three Buy List stocks will report earnings; CA Technologies ($CA), Johnson & Johnson ($JNJ) and Stryker ($SYK). All three are excellent stocks and Stryker already told us to expect good news in this report.

Last October, CA Technologies told us to expect earnings-per-share to range between $2.13 and $2.18 for its 2012 fiscal year (ending in March). On Tuesday’s earnings report, I think there’s a good chance the company will raise the lower bound of that range. The stock is a very good buy up to $24 per share.

On Wednesday, Hudson City Bancorp ($HCBK) is set to report its Q4 earnings. This is a stock you should pay close attention to, but you want to ignore next week’s earnings report because it won’t be pretty. The good news will come in future quarters. Hudson City currently yields 4.69%.

Before I go, I want to highlight a few other stocks. I was pleased to see AFLAC ($AFL) burst through $47 per share on Thursday. It’s about time! The duck stock will report earnings on January 31st. Look for another solid report.

Oracle ($ORCL) is another stock that’s quietly recovering from an earnings disappointment. Smart investors know to never count this company out. Oracle is a good buy up to $30 per share.

I usually don’t pay too much attention to the weekly jobless claims reports but the trend continues to be very positive. Thursday’s report showed the fewest claims in nearly four years. This should bode well for the next employment report in early February.

That’s all for now. Earnings will dominate the headlines next week. We’ll also have a Fed meeting (snore! don’t expect much), and on Friday we’ll get our first look at the Q4 GDP report. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on January 20th, 2012 at 5:37 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.