Sam Collins

Looking Ahead

by Sam Collins   10/15/08

Even with the governments of the world cooperating to inject capital in unheard-of numbers and in unimagined ways into key banks, the stock market could not hold onto a gain for any more than a day.

Shortly after Tuesday's opening, the Dow (DJI) was up 400 points, but wild swings throughout the session created a feeling of instability. At the low, the Dow was off more than 300 points.

The government provisions mean nine of the world's largest banks will receive $125 billion, including Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), Morgan Stanley (MS) and Wells Fargo (WFC). The injection of funds sent the financial group higher and so the Financial Select Sector SPDR (XLF), an ETF that tracks the group, was up 6%.

Johnson & Johnson (JNJ) gained 2.1% following its upward revision of the full-year 2008 earnings outlook.

But consumer-discretionary and technology stocks traded lower overall. Coca-Cola (KO), a Dow-30 stock, fell 7.5% and Microsoft (MSFT) dropped 5.5%. Intel (INTC) fell 6.2% in advance of today's Q3 earnings report.

At the close, the Dow Jones Industrial Average (DJI) was down 77 points to 9,311, the S&P 500 (SPX) fell five points to 998 and the Nasdaq (NASD) was down 65 points, closing at 1,779.

On the New York Stock Exchange, almost 1.9 billion shares traded, with more stocks up than down by a margin of 17-to-14. The Nasdaq traded 1.3 billion shares and decliners were ahead by 3-to-2.

Crude oil (November contract) lost $2.56, closing at $78.63 a barrel, and the Amex Energy SPDR (XLE) gained 6 cents at $50.61.

Gold (December contract) fell for the fourth day in a row. At the close, it was off $3.00 at $839.50, and the PHLX Gold/Silver Index (XAU) gained $2.86 at $107.35.

What the Markets Are Saying

After a day like Monday, many expected to see stocks continue higher -- pushed by the desire of investors not to miss a major bottom. And there was the argument that, with institutional volume arriving after their long weekend, a move to higher prices -- and even into the S&P 500 (SPX) overhead beginning at 1,100 -- was likely.

But stocks travel their own perverse path and, instead of another blast-off, we got a fizzle.

Banks moved sharply higher -- though that was no surprise with the huge injection of cash. But the technology sector took a serious hit Tuesday and so did retail sales stocks.

The ProShares UntraShort Consumer Services ETF (SSC) rose 3.94%, reflecting the weakness in the sector. But after a thorough drubbing, investors are still numb and confused, especially regarding the impact of the financial rescue plan and its never-ending rollout, as well as the future of the market.

In such times, it is helpful to examine the history of the markets in similar circumstances and devise a plan from that. But first we have to know the probable direction of the market, and to help us along is an interesting piece from Arrow Funds called "Market Turns."

"With market indices trending lower and volatility hitting extreme levels, many investors have lost confidence in financial institutions and the market. Others have exited the equity markets in fear."

"While history does not always repeat itself, it can serve to guide us through these tough times."

"On Oct. 10, the rolling 12-month return for the S&P 500 (SPX) was negative 41.2%. The market's response after these periods is very telling -- the average one-year return after the worst 12-month period was 35.2% and the average one-year return after the best 12-month period was 7.9%."

So, the overwhelming evidence shows that one year from now, stocks will likely be much higher than today. After viewing hundreds of charts and many earnings estimates, I am impressed by the number of stocks that are at extremely attractive prices. And many, even some blue chips, have dividend yields that are unprecedented.

The well-informed investor will no doubt use this opportunity to collect a package of gems.

Today's Trading Landscape

Earnings to be reported today include: Abbott (ABT), Alliance Financial (ALNC), AMR Corporation (AMR), AptarGroup (ATR), Astoria Financial Corp (AF), Asure Software (ASUR), Badger Meter (BMI), Cemex S.A.B. de C.V. (CX), Crown Holdings (CCK), Datalink Corp (DTLK), Delta Air Lines (DAL) and DiamondRock Hospitality Co (DRH).

eBay (EBAY), Exfo Electro-Optical Engineering (EXFO), Exponent (EXPO), Joe's Jeans (JOEZ), JPMorgan Chase & Co (JPM), Kinder Morgan Energy Partners, L.P. (KMR), Kinder Morgan Management LLC (KMP), Landstar System (LSTR), LeCroy Corp (LCRY), Lufkin Industries (LUFK), Marshall & Ilsley (MI), Novellus Systems (NVLS), Piper Jaffray (PJC), Polycom (PLCM) and Pure Bioscience (PURE).

RLI Corp (RLI), Rurban Financial Corp (RBNF), Spansion (SPSN), Spartan Stores (SPTN), St. Jude Medical (STJ), Steel Dynamics (STLD), Suffolk Bancorp (SUBK), The Coca-Cola Co (KO), TrueBlue (TBI), Universal Forest Products (UFPI), Valmont (VMI), Votorantim Celulose e Papel S.A. (VCP), WD-40 Co (WDFC), Wells Fargo & Co (WFC), Westamerica Bancorporation (WABC) and Xilinx (XLNX).

Several economic reports are due today: International Council of Shopping Centers (ICSC) Chain Store Sales Index for Oct. 11, September Producer Price Index (the consensus expects negative 0.3%), the September PPI excluding food and energy (the consensus expects 0.2%), September Retail Sales (the consensus expects negative 0.7%), the September Retail Sales excluding autos (the consensus expects negative 0.3%), the October New York Fed Manufacturing Index (the consensus expects negative 9.4), the Redbook Retail Sales Index for Oct. 11, August Business Inventories (the consensus expects 0.3%), and the Federal Reserve Beige Book.

Third-quarter earnings season is now in full swing. Intel (INTC) beat forecasts by a penny, JPMorgan (JPM) and Coca-Cola (KO) have also beat estimates.

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