Economy, LinkedIn, Technology and a Revisit

Jobless Claims fall unexpectedly and the buyers step in to erase the drop from Wednesday. Is the economy really that healthy based on the jobless claims? Talk about grasping for straws! The 324,000 claims was a decline of 18,000 on the week. This is a seasonally adjusted number and it may be tweaked as we go forward, thus it isn’t an economic data point that would make me run out and put all my money stocks. Add to it the rate cut by the ECB (European Central Bank) of 25 basis points to 0.5% to make more sense of the rally on Thursday. And for good measure we saw a big drop in the trade deficit for March. It was the combination of positive data related to the economy that helped spark the rally. It also alleviated the fears that had developed on Wednesday from the ADP Private Sector jobs report missing badly. The economy is far from showing stronger growth, but when you have a market environment that is driven by the headlines day to day, they feed off positive days as the buyers stepped in. Still cautious about the downside and believe you have to protect against the reversal of fortunes in play currently.

I read a analyst comments on the economy, which he stated, investors don’t want a stronger economy. If the economy turned higher relative to growth, stocks would react because inflation concerns would rise, and that in turn would stop the cheap money from the Fed. Interest rates would rise and it would be perceived as a challenging environment for stocks to grow. Of course for stocks to continue higher in a slow growth environment you need to have revenue growth. That is where the current earnings period has struggled. That is a result of a deflationary bent to the economic cycle currently. You can see we are in a precarious situation currently. The story of goldilocks and the three bears is going to be the same one the Fed must deal with. Not too hot, not too cold, but just right. It will be nothing short of a miracle if they can pull that off going forward.

LinkedIn (LNKD) posted better than expected earnings and revenue related to earnings after-hours, but then proceeded to disappoint everyone with lower forecast for their revenue outlook. Down more than 10% in pre-market trading it is not looking good for the stock to start the trading day. The news will impact the technology sector and we should watch for further ripple effects from the stock. This could also create an opportunity in the stock depending on how it all unfolds. This is one to add to your Watch List.

Technology broke to a new high Thursday as XLK move to $30.92. This has been one of the best sector since the low on April 18th gaining 5.4%. Semiconductors have been the leading subsector up 8% for the same period. The large cap technology stocks have also been a big part of the push higher with Microsoft, Intel, Apple and Google all adding to the recent move higher. If the broad indexes are going to continue higher this is one of the leaders that must maintain an upside momentum.

Earlier this week I outlined several sectors to watch relative to downside risk. Healthcare has struggled to overcome some missed earnings in the biotech and pharmaceutical sub-sectors. XLV has tested support at $46.75 again and holding, but we need to manage the risk of the downside as we move forward. As we stated in the previous update on the sector the price of the stocks are ahead of the earnings and revenue growth. A pullback to a lower level of support would offer a opportunity to add to our position. Consumer Staples is trading sideways following several earnings mishaps. The same issue exists in the sector as well with earnings strength looking forward lagging the current price of the stocks. Energy dropped quickly on the way to the low on April 18th. The challenge has come from volatility in the underlying commodities. This has disrupted earnings stability and revenue. The bounce off the low has been positive for the broad sector, but digging in to find the leadership currently is important if the sector overall is going to move to new highs. These three remain in a uptrend, but they have to be managed going forward relative to the upside as well as the downside.

Be disciplined in managing your portfolio and use stops in the event things go opposite of your opinions.