Weekly Update- October 19, 2012

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Weekly Update- October 19, 2012

By: Michael Vodicka

“A lot of hope and optimism was priced into the market in the last four months.But now, some very stark realities are back in play.”

 

This was a big week for the market, and not for the better.

Last week we talked about how economic data, and earnings in particular would drive stocks now that recent monetary stimulation is fading.

Here’s what we said.

“For the first time in three years analysts are calling for earnings to contract. Earnings are still good in general, but it is a signal that the economy is slowing and that margins are at the top of a 3-year cycle. Those are never good things for stocks.”

That turned out to be exactly what happened.

We saw some major misses this week from some very important companies. That list includes tech bellwethers IBM and Intel, both missing expectations and weighing heavily on the averages.

Google also took a beating, reporting a weak quarter of its own that sent shares down as much as 10% in one day. More on Google below in the updates.

Before those big blue chip disappointments hit the Street, the market was actually looking strong, rebounding from the recent wave of weakness with four days of gains that saw the Dow up more than 100 points on two occasions. But that little blast of optimism came to a screeching halt when the S&P 500 coughed up it all up on Friday as the Street took a decidedly bearish tone into the weekend. Take a look at this week’s action below in the 5-day chart. A mid week rally met by a big sell off into the weekend.

 

 

 

 

That mid week rally threw a pretty serious head fake to investors. A lot of people are sitting on cash right now and want to get into the market. Any pullback over the last four months has proven to be a great time to buy the dip. But that mid-week rally looks like a short-term bounce in a longer move lower as weak earnings and guidance weigh on the Street.

So for the time being being patience looks like the way to go. A lot of hope and optimism was priced into the market in the last four months.But now, some very stark realities are back in play.

Updates:

Google, Inc. (GOOG) was one of the biggest stories of the week, missing Q3 expectations by a wide margin with profit down 20% from last year. A big part of that miss came on weakness in Motorola Mobility, included in the company’s results for the first time. But with revenue growth excluding Motorola falling for the fourth consecutive quarter, from 20% to 19%, the stock took a pretty solid shot and fell about 10% on the week.

Bigger picture, this is still a solid company in a growth industry. But just like every other company in the world, Google is struggling with weakness in the global economy. There could be more down side from here but after a 30% gain in Q3, this is a normal correction and longer term a chance to buy on a dip. Check out the sharp decline in Google below. Yikes. That’s a pullback.

 

 

 

 

McDonald’s Corp (MCD) also reported disappointing results, pushing shares down 4.4% on the week. The two problems McDonald’s is fighting right now are higher input costs and slower global growth. Grain prices shooting higher is bad for the company’s margins. Not exactly a death sentence but it is weighing on shares a bit, which saw big gains in 2011. I still like McDonald’s as a solid blue chip for  a long-term holding. It also has a solid dividend, which is a nice bonus is a low-yield environment. Take a look at the pullback below.

 

 

 

 

And finally, to end on a good note, Ingredion Inc. (INGR), a food ingredients company that actually benefits from higher grain prices, posted an impressive 4% gain on the week after reporting strong Q3 results. This is a direct play on the bullish trend in food and agriculture. So with another good quarter and positive guidance in hand, Ingredion has some solid momentum. Take a look at the solid week below in the weak market.

 

 

 

 

That’s all for this week, but until next time, here is a real interesting article discussing how pending tax hikes in 2013 is encouraging people to sell stocks in order to take advantage of the lower tax rate. It’s a great example of hoe legislative uncertainty is bad for the market. Enjoy.

Wealthy Advised to Sell to Sell for Gains Before Unfriendly 2013

Your Investment Partner,

Mike

Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment  Advisor  (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of  Trade before  spending five years managing equity portfolios for a private investment research company.

Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65).

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