Earnings Are the Key

April 12, 2007
By seadmin

After a tough bout of selling throughout the first two weeks of March, the market managed to do what it has done so often in the recent past by mounting a healthy comeback. The final half of March and the first two weeks of April brought renewed confidence in stocks. That renewed confidence in equities is at a critical juncture this week.

Why are things critical right now? Simple: earnings. The entire market is waiting on the report cards of corporate America that will begin rolling out this week. The report cards will tell us if this market is headed for the honor roll or if stocks will be sent for remedial education.

The general consensus out there is that many companies may post only tepid numbers for the first quarter. Soon we’ll see if the overall slowdown in the economy has had a big impact on the corporate bottom line. I suspect that earnings will be only modestly positive, with the important guidance for the next few quarters reflecting an overall contraction in corporate growth.

If we get some modestly negative news about earnings going forward, we could see a bouncing around of stocks akin to what happened throughout March. Better-than-expected numbers and healthy outlooks could send the market surging to new 52-week highs. However, the flipside of this coin appears if earnings and guidance come in well below expectations. If earnings and guidance fall short of expectations, we could retest the lows we saw in March. (See the chart below for a full view of the March volatility).If we get some modestly negative news about earnings going forward, we could see a bouncing around of stocks akin to what happened throughout March. Better-than-expected numbers and healthy outlooks could send the market surging to new 52-week highs. However, the flipside of this coin appears if earnings and guidance come in well below expectations. If earnings and guidance fall short of expectations, we could retest the lows we saw in March. (See the chart below for a full view of the March volatility).

As I’ve mentioned, I really think we are at a critical market juncture here. Earnings and economic news will be the key going forward. Right now, the bulls are waiting for some kind of solid news to justify their optimism. Those in the bearish camp are fearful that we haven’t seen the last of the correction that began with the Feb. 27 plunge of 416 points in the Dow.

The way I see it, the best approach for investing in stocks right now is cautious optimism. I do think the market is headed for a rally sometime this year, perhaps even very soon. However, waiting for confirmation on the earnings front before making any big bets only makes sense at this critical juncture. If we get lackluster earnings over the next several weeks, then caution will serve you well. If, however, we see this market take off on good news, you’ll have more than enough time to get into stocks without missing any major upside.

In the meantime, I think the best way to play this market is to pick your spots with sector funds. Right now in my Successful Investing advisory service, we are allocated to an energy exchange-traded fund (ETF) that gives you exposure to the best energy companies around. Given the big surge in oil and especially gasoline prices, I think we are in a great spot to profit from our energy exposure.

If you want to find out more about this fund and how to take advantage of the volatile energy sector with Successful Investing, click here.

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One ETF in the energy space that I want all my Alert readers to take note of is United States Oil (USO). This fund seeks the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund invests in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on exchanges.

As you can see by the chart above, the fortunes of USO have really given investors something to smile about in 2007. Since mid-January, USO has delivered some very slick gains for those who ventured into the oil space.

I can’t say that I am surprised about this move higher in oil. Most of the world’s crude oil supplies are in countries less-than-friendly to the United States. This situation is not likely to change anytime soon. In fact, I think it is likely that such geopolitical risks will rise in the years ahead.

The United States also is suffering from a nasty bottleneck in the refinery industry. That bottleneck has restricted the available supply of gasoline that comes to market and it is one reason why we’re paying through the nose at the pump.

If we see continued upside in oil and gasoline, I may add USO to one or more of my advisory services. For more on all of my services, click on the links below:

Click here to learn more about Successful Investing
Click here to learn more about ETF Trader

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