Weekly Outlook: Sell the Rally?

As we move from a market that seemed to have no bottom to a market with--potentially--a tradable low, it is little surprise that we are hearing that stock market wiseguys (and gals) are readying themselves to fade--or go against--the bounce in the markets that began this week.

It's not at all a far-fetched notion. All of the major indexes remain below their 200-day moving averages. And as we have stressed repeatedly in articles at TradingMarkets and in our TradingMarkets Path to Professional Trading course, any strength below the 200-day moving average should be suspect--at least in the short-term. This means that for many market participants, a two-fold strategy going forward will likely make a great deal of sense. Those with a trading bent--or for those investors who also participate in the markets on a short-term basis--will likely be proven correct to bet against some of the beaten-down stocks that have shown some recent strength in spite of weeks and weeks of selling.

Many of the stocks that have outperformed this week were those with the largest amount of short interest. Short interest refers to the number of shares sold short against stocks, with a large degree of short interest representing a near consensus on the bearish outlook for a given stock. When markets begin moving higher after an extended correction, however, those who have shorted stocks need to cover and the process of covering or buying back stock is all the more pronounced in those stocks that were most heavily shorted. Part of the suspect nature of short-term strength in markets like these has to do with this short-squeezing effect, as the buying pressure of short sellers covering their positions inevitiably moves stocks higher.

On the other hand, there are some trading opportunities to the upside in some of the better names that have retreated to their 200-day moving averages, this includes stocks like Amazon.com, Costco, Google. Genzyme, Microsoft and Research in Motion--just to name a few from the Nasdaq 100. These are clearly among the bigger-name stocks that traders should keep an eye on when looking for the right kind of weakness, the right kind of "dip" to buy in a market that still has yet to move significantly beyond its recently installed lows.

Investors, for their part, need to ask themselves whether or not stocks are likely to be higher one year from now or lower. And if there is a sense that stocks could indeed be higher in January 2009 than they are in January 2008, then it is more important than ever that investors stick with high PowerRating stocks, the stocks with both greater reliability than the average stock in terms of being higher in one year's time, as well as a greater likelihood of outperforming the average stock. While it is not out of the realm of possibility that the stock market could have entered a bear phase back in October 2007, it is no less possible that we are seeing the sort of correction that provided great opportunities for investors, for example, in the fall of 2004, when the S&P 500 last slipped beneath its 50-week moving average.

World's Most Anticipated Recession Watch

Now that the Fed is believed to be fully on-board with regard to future rate cuts, and the entire political class in Washington is united in building a recession-beating economic stimulus package, are we still convinced that the world's most anticipated recession is still a guarantee?

Legendary hedge fund trader and speculator George Soros seems to think so. Writing in the Financial Times earlier in the week, Soros suggested that the current financial crisis is the "worst in sixty years." Most of Soros' critique went along familiar lines: the boom-bust cycle, and the role of credit in accelerating the ascent and the descent as market perceptions shift from "can't miss" to "destined to fail." Soros also pointed out how the high-octane nature of speculation this time around, a combination of exotic derivatives and securitized mortgage debt, had made it much more difficult for regulators, the Fed and political Washington to figure out just how to deal with the unfolding bust we are seeing in the multi-billion dollar write-downs that have been commonplace on Wall Street over the past few months.

The bright side? Like a lot of internationally-minded speculators, Soros continues to think that countries like China will come out of the current crisis stronger than many. Saying that China is in a "very strong countertrend", Soros suggested that whatever economic ills strike the United States, the result is more likely to be a "radical realignment of the global economy" (in favor of China) than an outright global recession. That said, the geopolitical effects of such a realignment, are much more potentially troubling as a waning U.S. may be encouraged to seek out protectionist policies--or worse-in an attempt to reign in a waxing China.

Stocks in the News

Most of the stocks in the news this week were being heralded for earnings that either met or exceeded anaylst estimates. Infrastructure-related companies like Caterpillar reported strong earnings based largely on overseas sales. And a modest forecast from Apple ignited not-so-modest selling among investors.

U.S. sales were down, but strong international demand helped Caterpillar (CAT@CAT | Quote | Chart | News | PowerRating) beat analyst expectations for the fourth quarter and produce net income gains of 11%.

Online broker, E-Trade (ETFC@ETFC | Quote | Chart | News | PowerRating) reported selling a $3 billion portfolio of mortgage debt for a loss of $2.2 billion, which contributed to the company's $1.7 billion loss for the fourth quarter.

Although its market share slid in North America, Nokia (NOK@NOK | Quote | Chart | News | PowerRating) managed to earn 40% of the worldwide market formobile phones last year. Beating fourth quarter estimates, Nokia reported earnings growth of 57%, helping allay fears of a cell phone slump.

The woes of the banks continues as Bank of America (BAC@BAC | Quote | Chart | News | PowerRating) announced this week a fourth quarter net income decline of 95%, with full-year earnings down 29%. The company managed to raise $12 billion through a sale of preferred stock.

MacBook Air, touted as the world'st thinnest notebook computer, and quarterly profit increases of 57% were apparently not enough for investors in Apple (AAPL@AAPL | Quote | Chart | News | PowerRating) who focused on the company's earnings miss and slowing iPhone sales.

Pfizer's (PFE | Quote | Chart | News | PowerRating) fourth quarter profits fell sharply, but the drugmaker managed to beat analyst estimates and raised its revenue forecast for 2008. Softening sales of top cholesterol drug, Lipitor, among factors leading to profit weakness.

A positive forecast for 2008 and an earnings beat characterized news this week from Microsoft (MSFT@MSFT | Quote | Chart | News | PowerRating). Desktop software continued to be a revenue driver for the company, as did sales of the Xbox gaming console.

What to Look for Next Week

Monday: New Home Sales
Teusday: FOMC Meeting Begins / Durable Goods
Wednesday: ADP Employment Report / FOMC Policy Statement
Thursday: Jobless Claims / Personal Income, Spending
Friday: Construction Spending / Nonfarm Payrolls / Consumer Sentiment

Best Performing Stocks (PR 8-10) of the Last Five Days

Here are some of the best performing, high Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 8 or 9.

Penn National Gaming Inc. (PENN@PENN | Quote | Chart | News | PowerRating). Long Term PowerRating 9
Federal Express (FDX@FDX | Quote | Chart | News | PowerRating). Long Term PowerRating 8
Illinois Tool Works (ITW@ITW | Quote | Chart | News | PowerRating). Long Term PowerRating 8
Retail HOLDRS ETF (RTH@RTH | Quote | Chart | News | PowerRating). Long Term PowerRating 8
United Parcel Service B (UPS@UPS | Quote | Chart | News | PowerRating). Long Term PowerRating 8

Worst Performing Stocks (PR 1-3) of the Last Five Days

Here are some of the worst performing, low Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 1 or 2.

Echelon Corporation (ELON@ELON | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Palm Inc. (PALM@PALM | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Under Armour (UA@UA | Quote | Chart | News | PowerRating). Long Term PowerRating 2
Wellcare Health Plans (WCG@WCG | Quote | Chart | News | PowerRating). Long Term PowerRating 1
Leap Wireless International (LEAP@LEAP | Quote | Chart | News | PowerRating). Long Term PowerRating 1