Weekly Wrap Up, July 5 - July 8 2011

Economy: Bad employment number

Despite the bad NFP number for June, the average pace of change in private payrolls is showing just some normal volatility as it did in previous expansion cycles.

S&P500: The market is ready to power higher

Previous up legs closed higher almost every week after the inital rally off the lows.

Shorter term, the 1341 SPX support on the daily chart was not broken while the market registered a normal 20 points correction:

One Week, One Stock: Intercontinental Exchange (ICE) - looking good

Yearly sales growth is expected to register a mild slowdown in FY 2012, which does not look ominous and should not bring earnings surprises.

Using the historical P/E range and an estimate for the EPS at the end of FY12, I got an average price target of 166.

I discounted the Zacks.com EPS estimate by 10% in order to be conservative. At 128, Friday's close, the stock looks undervalued. Also favoring the upside is the recent trend of estimated EPS revisions:

source: Zacks.com

Looking Forward

Next week we get a Ben Bernanke testimony, a retail sales report and a CPI report among other data. I think the market will anticipate these events by moving up.

In light of the recent employment report, I think the market will rise into BB's speech. Also, there are strong expectations from the retail sales report and I expect the CPI to come in showing a further slowdown in its average pace of change.

Ideas

(continued from last week's wrap up, ideas section)

The intraday movements of the put/call ratio would have suggested long entries starting at 2:00 PM, eastern time. Not bad!

Trading

I am long from 1330.5 ES (entry posted here).

I will be looking for opportunities to further add to this position as the market confirms Friday's after-the-lunch strength.

Weekly Wrap Up, June 27 - July 1st 2011

Economy: ISM New Orders vs Inventories ratio suggests future economic strength.

The ratio above is at levels from where it usually starts to go up, meaning that in the near future businesses will be faced with increased new orders compared to their inventories. This means rising capital expenditures, employment and inventories, in other words, increased economic growth.

S&P500: Strong week pointing higher.

Last week market action was very strong. As seen in the chart above, previous such strong weekly candles coming after greater than 7% corrections led to more upside.

Generally, strong bull legs are followed by weaker ones (purple arrows). In 2010 the market went up 17% after the 32% rise in 2009. Now, after the 30% rise from September 2010, a 15% rise would put the market at 1446.

Breadth was strong: in just one week there were 2 consecutive days with greater than 80% up volume and one day with greater than 90% up volume.

One Week, One Stock: First Solar, Inc. (FSLR) - looking bad

Sales growth is expected to slowdown a lot in FY 2012 ...

... while operating margins are dropping fast on a yearly and quarterly basis ...

... and EPS estimates are revised down

However, the market already knows it and the stock is down ...

... so it may get close to a buy point as soon as the problems with operating margins go away.

Looking Forward

Two major events next week:

> European Central Bank meeting: a rate hike is in the cards. Corrections of about 1% or to the 1.44 zone, before the announcement, are buying opportunities for EURUSD.

> US Employment Report: My current view is that the market will anticipate a strong number since other indicators for June were strong. I will buy SPX on pull-backs before the announcement.

Ideas

Time the intraday market swings by fading spikes in the put/call ratio (detailed post here)

AAPL - Trouble in Paradise?

The sentiment towards Apple is generally very bullish. Here are two covers suggesting that:

- Time Magazine:

- Le Monde Magazine: Jobs - The new Gutenberg?

I believe that sentiment at an extreme coupled with fundamental problems represents a dangerous mix. So I did a more detailed analysis of Apple.

The company looks great at the first glance. Its sales are growing healthy and profitability is high but I have stumbled upon a few signs of fatigue:

1. The year-over-year quarterly sales growth for the next two quarters is slowing (green; Yahoo Finance estimates used):

If the 3rd quarter in FY11 grows at about a 30% rate, it represents a slowdown of 50% from a year ago, which signals big problems with meeting earnings expectations by the end of FY11.

2. The latest quarterly operating margin is dropping significantly compared to the year ago figure:

> latest Q OM: 26.77%

> year-ago Q OM: 30.18%

This means the company is slashing prices to increase sales, a behavior that cannot last forever without bringing down earnings growth expectations.

3. The latest tax rate is dropping suddenly compared to previous numbers, suggesting the company might be struggling to meet the earnings forecast:

So an explosive mix might be starting to brew. The company is not overvalued yet with a P/E of about 20 so it may continue to go up along with the markets but I think that at the next intermediate-term correction in 2011 AAPL is going to be a great short.

FSLR Q3 Report

First Solar (FSLR) is one of the three companies I keep very close track of. The other two are Apple and FedEx. I focus only on such a small number because I do not have an army of analysts at my disposal. I try to choose significant companies and only replace them rarely.

FSLR is due to report today for Q3, ending September 2010. Here is an analysis of its sales growth rates compared to year ago levels:

Usually the sales growth slowdown by about 50% signals trouble ahead, like earnings disappointment. Notice how, starting from 2008 and until the current quarter, the growth rates dropped by at least 50%. No wonder the stock hasn't been doing great during this period:

FSLR chart, 2008 - today

The values for q3 (green) and q4 (red) are estimates from Yahoo Finance. Q3 is estimated to grow at a good rate compared to q3 last year but in q4 2010 the company is expected to register a drop in sales compared to q4 2009! That is a clear red flag and it makes FSLR a good candidate for a bearish portfolio.

AAPL Quarterly Report

Apple is due to report earnings today after the close. Here is how I quickly gauge the probability of a negative surprise:

Since earnings come from sales, a first sign of a weak report would be the annual rate of growth of quarterly sales slowing considerably. In the table above the red numbers are the latest sales estimates from Yahoo Finance. The purple ones are the year ago figures.

The rate for q4 this fiscal year (53.6%) is roughly equal to the one from last year (54,6%) suggesting that there is no reason to expect a bad report. The same holds true for q1 of the next fiscal year (green rectangle).

These estimates are available long before the day of the actual earnings release. Thus, a portfolio can be built in anticipation, centered on the stocks that have good odds of meeting or beating their estimates.