Trader Talk

Looking Ahead To Q1 Trades

The good news is that we have decisively broken into a higher trading range on the S&P 500. It took five weeks of trading in a range, but we did it.

The bad news is that we did it on very light volume, which is not surprising given it occurred on the two days after Quadruple Witching and just before Christmas.

And seasonal light volume is not the hot topic on trading desks. The talk is all about "yield steepeners" and selling into the first quarter rally.

The "cynics trade": I've taken to calling the widespread belief that the first quarter of 2010 will be followed by a second quarter correction the "cynics trade."

Ned Davis, a respected stock analyst, summarized this position in a note to clients: "...after rallying in the first quarter, the stock market trend would be likely to encounter turbulence in the second and third quarters...We presented a best guess projection that the S&P 500 will move in a range of 1300-1350 on the upside and 950-1000 on the downside, with the low end reached in the second or third quarter."

950 is a long way above the 666 we hit at the market bottom on March 6th, but it is still 40 percent below where we are this morning.


1) Strong top line gains on better demand and improved margins have been propelling tech stocks, and that's evident again this morning. Micron rises 3 percent pre-open to a 2-year high after reporting significantly better-than-expected Q1 earnings ($0.23 vs. $0.07 est.).

With margins more than doubling from the prior quarter and its first quarterly profit in almost 3 years, the memory chipmaker saw sales jump 24 percent on heightened volumes (DRAM up 25 percent, NAND flash memory up 16 percent) and improved pricing (DRAM up 21 percent, NAND flash memory up 5 percent).

Techs have been the leadership group this year, with the S&P tech sector rising nearly 60 percent in 2009. This compares to the S&P 500's YTD gain of 24 percent. IBM has quietly risen to a 9-year high, Oracle near a 9-year high, Hewlett-Packard, Google, Advanced Micro Devices near or at 2-year highs.

2) Red Hat is up 7 percent after its Q3 earnings topped expectations by a penny as revenues soared 18 percent. Subscription revenues for the software developer jumped 21 percent and gross margins rose improved from the year ago period. CFO Charlie Peters noted "strong bookings, particularly in North America" helped boost revenues in the quarter.

Shares of Red Hat will open at a fresh 3.5-year high this morning.

3) ExxonMobil was downgraded to "hold" from "buy" at Soleil Securities after the analyst there reduced earnings estimates on lower oil prices and refining margins.



Questions?  Comments?