Earning and Outlook Driving Stocks

We noted in our weekend update that the large cap technology stocks would set the tone for the trading week. On Tuesday Dell announced another step forward in taking the company private as Microsoft would offer some financing in the range of $1-3 billion. The stock was up 2.2% on the news. After hours Google announced earnings and they beat the earnings number, missed slightly on the revenue, but offered solid guidance going forward. The stock was up more than 4% on the news after-hours. IBM earnings were solid as well and the stock was trading up more than 4% as well. Research in Motion jumped 13% on upgrades, licensing deals and asset sales. That helped keep the NASDAQ 100 end in the green on Tuesday. This is what we needed to hear from the large companies in the sector and the tone should be positive  for Wednesday trading on the upside.

The transportation sector (IYT) gained 1.1% in trading on Tuesday, but also hit our near term target at $102.50. Is there more upside in the sector short term? I would believe there is, but that doesn’t¬†preclude¬†the fact we need to manage the risk of the sector. ¬†I would be willing to take half of the position off and let the balance run with a stop in placed near the $100.50 level. The railroad stocks have been climbing steadily since the low in November. That is roughly the time that coal¬†bounced¬†off the ¬†low in price. The correlation between the two is the most profitable product to transport for rails is coal. Capacity has increased with the lower prices, but watch coal as the price has climbed and could impact shipments. I still like the airlines, rails, trucking and shippers looking forward, but a pullback may be in store short term. If we get the test lower look for an opportunity to buy the transports again.

REITs (Real Estate Investment Trusts) continued to trek higher as well. IYR, iShares Real Estate ETF moved above resistance at $64.80 in January following the resolution to the fiscal cliff talks in Congress. It wasn’t the deal that was the catalyst as much as the understanding of the new tax laws. Concerns around deductions, capital gains and dividends kept a lid on the sector short term. The upside has continued to be positive as the ETF challenges the September high. If it can continue the upside momentum there is an opportunity to add to the position on the move higher. Equally the opportunity exists on a pullback to support near the $66 level. Either way this is a sector to watch on the upside.

MLPs (Master Limited Partnerships) have been in equal response to the fiscal cliff resolution gaining upside momentum. AMLP, Alerian MLP ETF has moved above the $16.85 resistance and is in position to test the February highs. Watch for a pullback or test of the vertical move off the December lows as an entry point.

Worry is rising relative to home prices rising too fast? Yes, that was actually published over the weekend. I understand the concern, but the reality is more on the demand side still from my view. New homes are selling, but the shadow inventory in existing homes and foreclosures is far from over. The entrance of REITs into the rental game has added some pressure, but this is a new wrinkle for the buyers and sellers. Interest rates moving higher will still be the biggest¬†deterrent,¬†and so far Mr. Bernanke hasn’t given an inch on the Feds bond buying spree which has kept rates low. The sector is extended to the upside and a pullback would be a surprise, but it would also present some opportunities. Watch to see how this sector unfolds.

Today we are watching the response to earnings in the technology sector. The futures are essentially flat as this is publish, but they will become more active as we approach the open. The key is to remain focused on the objective for each position in your portfolio and to manage the risk accordingly. Set you stops and let the markets uptrend play out. You can only manage money one day at a time.