Getting Optimistic Over the Short Term

Optimists hoped the official beginning of earnings season -- 179 of the S&P 500's components report this week -- would provide a catalyst for a rally. But early indications were providing a contrary message.

Bank closures in Washington, D.C., due to what the FBI called a "credible" bomb threat, certainly weighed on trading. But stock proxies already were weak early Monday morning in the wake of a disappointing earnings report from Citigroup (C) and ongoing concerns about General Electric (GE) following a critical article in Sunday's New York Times. Elsewhere, Bank of America (BAC) was down despite reporting better-than-expected results.

Major averages were recently trading well off their morning lows after the noon EDT deadline for the bombing passed, with the Dow Jones Industrial Average down 0.6% and the S&P 500 off 0.4%. The Nasdaq Composite was recently up 0.3% after having traded as low as 1740.61.

Correctly assessing the risk of terrorist threats is all but impossible. But today's midday reversal is noteworthy because it comes against the backdrop of market participants looking for some short-term gains. Notably, this group includes not only the permabulls but also some market watchers who up until now have been cautious or outright bearish.

Jeffrey Saut, chief equity strategist at Raymond James, is anything but a permabull, and continues to forecast major averages will remain mired in a long-term trading range similar to the 1976-to-1982 environment.

Furthermore, he noted "last week's action left a lot to be desired" from a technical standpoint, with all major averages trading below their recent "reaction lows." Furthermore, while the Dow entered this week above its 200- and 50-day moving averages of 9961 and 10,181, respectively, the S&P 500 was below its 200-day at 1137 and its 50-day at 1127 and the Comp was well below its 50-day moving average of 1834.

Still, "while we don't look for any miracles here, we are cautiously optimistic on a short-term trading basis," Saut wrote. Along this "trading vein," he recommends Boston Scientific (BSX), Donaldson (DCI), Gillette (G), International Flavors (IFF) and Kellogg (K). As with the market itself, those names were mixed at midday.

Paul Rabbitt, president of Rabbitt Analytics in Hermosa Beach, Calif., also forecasts "sideways action" for the foreseeable future and recommends investors must be willing to be short-term traders, as does Saut.

But Rabbit believes "it is now time to become more aggressive," reversing the cautious approach he has been espousing for six weeks, as noted here in mid-March. "We believe a short-term low will form in the next week and a rally could last four to six weeks before the next corrective phase resumes."

Rabbitt believes the outperformance of small-cap stocks might be heading for a near-term peak and believes the recent weakening of the dollar vs. the euro will further aid big-cap stocks. He's particularly optimistic about "defensive large-cap growth" names and raised his recommended exposure to health care -- recommending names such as Caremark Rx (CMX) and Mid-Atlantic Medical Services (MME) -- and consumer nondurables, recommending Coca-Cola (KO) and big-cap drugmakers such as Merck (MRK) and Johnson & Johnson (JNJ).

Notably, Rabbitt has been and remains more optimistic than Saut, and maintains a longstanding overweight in technology/capital goods. He's underweight finance, energy, retail and utilities.

Housing Goes 'Boom'

Friday's piece about housing stocks generated the (now) predictable amount of reader feedback from both sides of the debate, further anecdotal evidence that the sector is a battlefield. Among the more measured emails was one from the money manager quoted in the story as being optimistic about the group.

The source, who again requested anonymity, stressed he's a hedge fund manager who "looks at what is working now" -- not a long-term investor. Homebuilding stocks are "good trades which will have more room to run and won't lose 90% [of their value] like Infospace (INSP)," he wrote. But, "sure they will crack [and] if someone was smart or lucky enough to have been long homebuilders since last August, they should definitely sell some."

Remember, this guy is bullish on the homebuilders.

Finally, those interested in the broader debate on housing should take a look at the current edition of Barron's. The story's premise that housing "bears an eerie resemblance to the Nasdaq before the fall," should seem awfully familiar to faithful readers of this column. (Remember, it's an analogy, not a direct comparison.) Still, the piece contains some interesting information and research.

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