What the Market Wants: Looking for Certainty Amidst Uncertainty

That’s been hard to figure lately.  Uncertainty has not eased.  Not in Europe.  Not in the Middle East. Not in China or Japan. Not in the U.S., with a dead-heat election battle and unknown future Congressional dynamics.  Companies overall continue to beat earnings, mostly, and miss on revenues.  Now there is a certainty: earnings cannot keep going up if revenues keep going down.

Last week, the market at times, exhibited flight-to-safety elements with Large-cap Value stocks up +1.28% and the Technology sector down more than -2% on poor news from Google (GOOG), Microsoft (MSFT), Intel (INTC), and IBM.  Apple (AAPL) didn’t report earnings, but its stock led the tech slump.  While Utilities, a typical flight-to-safety sector, was third-best, Consumer Staples (non-discretionary) was down for the week with its weakness only exceeded by Technology.  Another bastion of safety, Healthcare was in the bottom half of sector performance.

Today we had it all.  A very weak opening followed by uninspired trading until the final 90 minutes of trading when the market suddenly gained nearly a full percentage point, diverging from a nearly two-day negative run.  To add to the confusion, Technology led the way, up about 1% on the day.  Go figure. 

Western Digital (WDC) reported better earnings and increased revenue but fell more than 5% in after-hours trading after sporting a 2% gain midday.  Seagate (STX) reported nothing, but rose more than 1% during trading hours and was off 4% in after-hours trading.  Yahoo (YHOO) also reported good earnings, fell during trading hours but was up more than 4% after-hours.  Caterpillar (CAT) had the standard line these days, beating earnings but missing on revenue, leading to a 1.5% gain during regular hours only to lose it all after-hours. We suspect Technology may be down in after-hours, but we can’t know for sure since the sector ETF’s aren’t trading after the market closed.

There’s no economic news until Wednesday when we get New Home Sales, which are expected to be up.  Initial Jobless Claims on Thursday are expected to be improved.  Durable Goods on Thursday are also expected be up sharply. We get the advance GDP for Q3 on Friday, along with Michigan Sentiment.  We won’t venture a guess on the advance GDP, but the result is likely to be important. 

This is the major week for earning reports with about 150 of the S&P 500 reporting along with a host of the others.  With VIX still near historical lows, you might consider a VIX derivative as a cheap hedge. Below are a few interesting companies that will report later in the week.

Here are the market stats.

AFLAC Inc. (AFL) reports earnings tomorrow, October 23, after the market closes. It’s expected to beat last year’s earnings by a penny. Analysts seem confident heading into earnings as eight have revised their current quarter estimates upward in the last 30 days with two of them in last seven days. The coming quarter and year also look favorable for AFL. Considering the financial sector’s strength, AFL appears to a safe place for investments.

U.S. Airways (LCC) reports earnings on Wednesday, October 24. It sports an extraordinarily low P/E and PP/E of 4.73 and 3.88 for projected EPS growth of 80% this quarter, 266% this year, 23.3% next year, and 71.35% over the next five years. LCC’s stock price has been subject to volatile swings in the last 6 months, often moving 8-10% in one day. Today it gained $0.45 but gave back $0.33 after-hours—not an unusual day. If those types of move bother you, this might not be the stock for you. However, if you can stomach rather large moves, LCC is worth consideration as it has been in upward trend lately.  Furthermore, analysts like where LCC’s going, as 11 out 14 covering the stock have revised their current quarter estimates upward in the last 30 days.

Proctor & Gamble Co (PG) reports on Thursday. It is expected to report earnings of $0.96 compared to $1.06 a year ago. Three analysts have revised their earnings estimates up in the last 30 days, though that hasn’t changed the average estimate. Don’t expect surprising growth or negative surprises from P&G. Its 5- year EPS growth is 8.28%, and it pays a 3.3% annual dividend. To generate additional income on your position, consider selling puts and calls. If you’re looking to enter PG, it’s worth purchasing half the shares you’d like to own, and selling puts at a lower strike that you would feeling comfortable owning it, in the event that it falls. Otherwise, it’s just more income.

DANA Holding Corporation (DAN) wraps up our list this week, reporting on Friday, October 25. It’s a strong auto-parts manufacturer that relentlessly innovates. However, this stock has a tendency to take volatile price swings. Analysts have been bearish lately, revising the estimates downward over the last month to just meet last year’s earnings of $0.45. It’s trading at a P/E and Forward P/E of 9.22 and 6.10 for a 13.20% growth rate next year and a 12.35% growth rate over the next 5 years. We like DAN over the long-term, but it may encounter near-term weakness. It would be prudent to hedge your position with covered calls and puts.

What the Market Wants