Only Small Gains as Market Sells Earnings News!

Only small gains for the broad market as the S&P rose .6% despite what were overwhelmingly good third quarter earnings reports. The vast majority of companies reporting earnings last week exceeded estimates and more than half exceeded top line revenue growth. Traders appeared to sell the news as stocks ended the week with only small gains. Some stocks even lost ground as selling pressure overwhelmed the good news. Despite the mixed results, the fear gauge as measured by the VIX index remained at low levels particularly for this time of year. Overall, that is a good sign as investors appear more comfortable with current market levels. Earnings season continues in full force next week as more than 70% of companies have yet to report. Expectations are more of the same with announcements likely following the patterns seen over the past week. QE2 is still on the horizon, but the FED offered no additional guidance last week. The market appears reasonably priced, but volatility could still spike at any time. Now is a great time to take some profits. In addition, volatility (VIX) is relatively low which makes options less expensive. This is a good time to use options and buy some protection for your portfolio. We may also sell some retail stocks as they have come under recent pressure after what has been a pretty good 6 month run. Spending will likely improve over the next few months, but will remain at very subdued levels. Long term we remain bullish on stocks, but we will remain mostly on the sidelines for the next two weeks as third quarter earnings season winds down. We will become much more active buyers once the dust settles from latest quarter. We did buy one stock last week, Herbalife (HLF) which had been on our buy list for a two weeks. Herbalife is due to report earnings Nov 1 and the stock has moved sharply in past earnings announcements. We do not normally take long stock positions in companies leading up to earnings announcements as there is risk that if the company disappoints, losses could be sharp. However, long term the stock potential is excellent given a 16 PE and earnings growth over 30%. The Stock has been consolidating over the past two weeks, so now is a good buying opportunity and we save the extra premium we would pay by waiting if the company exceeds estimates. We also had two covered call positions where we rolled up the exercise price. In essence, both HS and HUM stock have moved sharply higher and both represent stocks that we would like to keep a little longer. Rolling up the covered call strike prices provides opportunity to capture more gains from stock appreciation for minimal cost. On the options side, we plan to become more active buying call options in the next few weeks if volatility remains low, which makes premium prices more affordable.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? For this week, we again have nine stocks on our buy list, eight of which returned from the prior week with one new addition and one deletion. The returning stars are Clearwater Paper (CLW, Paper Products), TRW Automotive (TRW, Auto Parts), EBIX (Software & Programming), Medicis Pharmaceutical, Nanometrics (NANO, Semiconductors), Erie Insurance (ERIE, Insurance), Sapient Corp (SAPE, Software), and TPC Group (TPCG, Chemical Manufacturing). However, we would add caution regarding Nanometrics which dropped significantly after coming under selling pressure last week. Earnings are not due on the stock until Nov 2, which makes us concerned that the whispers coming out early on the stock are not good. We plan to watch this stock for now with no plans to buy until after the price finds support and if there is a positive earnings report. We also dropped Herbalife from our watch list as we purchased that stock last week in light of what we consider excellent long term prospects. We added one new stock to our watch list, Dorman Products (DORM, Auto Parts). The stock has had a strong run, up nearly 50% over the past three months as the Auto Parts industry has taken off. Consumers are holding on to cars longer during these frugal times and that means more profits for companies that make after-market parts. Despite the recent price rise, the stock remains attractive at a PE of 16. Return on Equity is outstanding and growth should remain strong for the foreseeable future. One final note, third quarter earnings announcements will continue for the next two weeks, so there could be significant volatility across specific stocks. Look to buy the stocks in our portfolios or watch list on pullbacks over the next few weeks and take some profits where you can.

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