Monday, April 13, 2009

Goldman Sachs Sends Mixed Message

Top Line: Earnings are on the minds of investors for several weeks. There may be some surprises but, all in all, the market should focus on the good reports. If we get a good pullback, we would recommend buying, as we have done for several months.

After the bell, Goldman Sachs announced a $1.8 billion profit. GS (we like their symbol) has also announced a $5 billion stock offering to raise funds to pay off the TARP money. Tonight's earnings were initially bought but ultimately succumbed to the weight of the stock offering. We should point out that the price increase during the trading day was 5.82 while the selloff amounted to only 1.94 so it was a positive day for GS.

The news before the bell was that the government wants GM (as they say Government Motors) to file for bankruptcy protection. That seemed to be the reason the market opened down hard this morning but over the course of the day the market mostly rallied. Still, the Dow managed to hold onto the 8K level. Why do you think that is?

Most of the opinions out there seem to think that the market is now overbought and should be sold. The most bullish opinions have the market correcting the huge gains we have seen over the past several weeks. We have said it would be appropriate for the market Not to let people back in with a selloff. We know a selloff can occur at any time but we would say that it is a buying opportunity and it will be bought.

We direct your attention to our favorite tells. The first one is the VXO, which traded back above 40 today. After a 25% rally, the VXO is stubbornly near 40, we think this is bullish.

Second, as bearish as the world has been in the past six months, there will be a bounce that clears that thinking process out. By the time this rally is over, we should have market sentiment that is wildly bullish. Do you really think that the bearishness can be eliminated by a one month move that took the Dow up 25% but represents only 1600 points out of the 7500 or so that we dropped.

Third, the money keeps on coming and where will it go? Right, it will go straight into the market. There is so much fear out there that cash is now definitely King. We heard about this Bloomberg article describing the cash levels: "Investors had a record 45 percent of assets in cash, including money-market investments, and a record-low equity allocation of 41 percent in March, according to the survey data. Historical averages are 25 percent and 60 percent, respectively." You can see a graphical version on the GRAPH tab on that website. People have their money in money market funds earning, what, less than one percent just because they fear the market??? As soon as the market shows them that it's going up "for Real", they will want to own stocks again and this 45% figure will drop as money goes back into the stock market.

As we write, the US futures are down a little which could indicate another down opening on Tuesday. With prices where they are, will the broader market sell off enough to encourage more buyers to come in? We still think there is some buying pressure under the market with "Surprises to the Upside" always possible.

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