Monsanto – positive trends expected to continue

McCormick – downside risk

Greenbrier – upside risk

As we’ve discussed frequently so far in 2013, our basic view of the market right now is based on the Federal Reserve’s support of the markets through U.S. Treasury and mortgage-backed security purchases, which combine to be the greatest amount of liquidity the Fed has ever given and is expected to continue through 2013 and perhaps even longer. Somewhat tied to this view is the “Great Rotation” view among so many that money is going to come out of bonds and Treasuries and go into U.S. stocks. This would naturally lead to a rise in interest rates and that’s exactly what we’ve seen for much of 2013 – U.S. Treasury yields have gone higher even though the Fed has been buying U.S. Treasuries. These means more money has come out of Treasuries than the Fed was able to put in, and much of that money has gone into U.S. stocks.

However, during the past three weeks we’ve seen U.S. Treasuries rally and yields decline. This shouldn’t be too much of a concern given the Fed’s action, but it does go against the “Great Rotation” theory and in the past has coincided with stock market selling. For nearly 10 years now, whenever yields have rolled over from an overbought level based on the stochastics to the point they are now, the S&P 500 has sold off with it or was about to, but also, by this time, it was at or near the end of the selling.

The S&P 500 closed last week at a high, so we haven’t seen such selling yet… and given the liquidity added to the market in April – four out of five trading days each week during the month – we’re not confident we are going to see any real selling. Still, this is the first real sell signal we’ve gotten in 2013 other than just some simple seasonality and it is worth watching closely. We are still buyers of weakness though so we will view any such selling as a buying opportunity.  Or, more accurately, we are focused on trading long around earnings and looking to hold some of our successful trades for an extended period and that’s the strategy we want to continue to have while the Fed is adding so much liquidity to the markets. But during periods of selling, we well take profits more quickly on our long trades and will give a little more weight to trading short.

For much of the past couple of weeks, the S&P 500 has pushed against the 1,563 area and then sold off the next day. Each selling day saw a higher low, but the S&P 500 couldn’t make it through until Thursday. To be confident the market isn’t selling off like, we need the S&P 500 to remain above this 1,563 area. There is still more support below, so we will still have a bullish bias as long as these support areas hold, but we’ll lighten up and be less aggressive below 1,563.

Monsanto

The biggest downside risks to Monsanto (MON) going into its earnings release are probably weather and comparability. The fiscal second quarter is the strongest seasonal period for the company as seeds are shipped ahead of planting. During the fiscal second quarter last year we experienced an unusually warm winter and mild spring, which puled forward sales from future periods into the second quarter. That means comparisons to the same quarter last year will be tougher since this year has been much cooler – to the point that the Economist recently published an article Jason Hansen, the scientist most commonly credited for first brining awareness to global warming, admitted that their global warming models have been wrong and unless temperatures rise over the next couple of years, the whole global warming theory will have been proven wrong.

But while the pull forward last year makes for tough comparisons this quarter, it makes it easier during the second-half of the year. In fact, even though the company soundly beat estimates last year, it also said that earnings during the second-half of its fiscal year would be essentially flat. That put the near-term growth behind it and the stock sold off over the next six weeks before bottoming. That could very well be the positive this quarter as the company should see stronger growth in the second-half of the year compared to last year. That suggests stronger earnings releases are still ahead and puts our bias on the long side with the upward trend in earnings estimates.

Still, when it comes to trading shares of Monsanto after earnings, there are also important factors such as guidance, but those items tend to affect the stock more on the gap. From there, the stock has traded based whether it beat or missed the MyRollingStocks® number. For example, when Monsanto has provided negative guidance in the past but reported earnings that were above the MyRollingStocks® number, the stock gapped lower by 3.59% on average, but then gained an average of 5.23% throughout the day and a month later it was up an average of 9.01%. The one time the company provided positive guidance but reported earnings below the MyRollingStocks® number, it just marginally ticked higher at the open, but was down 0.82% by the end of the first day and an additional 2.0% on the second trading day.

The consensus earnings estimate is $2.55 per share and the MyRollingStocks® number is $2.63 per share. The company is scheduled to report earnings before the market opens on Wednesday, April 3, 2013 with a conference call at 9:30 AM ET.

Technically, the stock gapped higher last quarter after it beat the MyRollingStocks® number and was an after-the-news play where we pointed out that the price pattern gave us upside room in the stock to just under $103, which it hit about two weeks later. We generally shoot for a greater return for our short-term trades, but this still calculates to a 95% annualized return before commission. Still, from the gap higher in January, the stock has formed a similar pattern just on a longer time scale, where as long as the stock remains above $105 it has upside room to $112.

McCormick & Co

Last quarter McCormick & Co (MKC) missed estimates and lowered guidance. The stock sold off on the news with heavy volume, which has turned out to confirm $61 as a strong support area that we see little evidence is going to be broken. The stock is a long way from $61 at the moment though and when you consider the company has historically traded at 16.8 times forward estimates but is currently trading at 20.7 times 2014 estimates, there is plenty of room for the stock to trade lower from Thursday’s close of $73.55.

The stock has also spent the entire month of March technically overbought based on the 14-day Relative Strength Index (RSI). The general rule is that when a stock exits the overbought condition it pulls back to the area it was when it first entered the overbought condition. For example, back on June 18, the stock entered the overbought condition at $57.83 and traded its way up to $59.24, but by June 25, it had traded back below $57.83. The stock opened on June 29 at $59.40 and the RSI pushed above 70, and by July 24, the stock was back below $59.40. The same move came after the overbought conditions in September and November.

There is support at $67 based on the prices just before the company’s negative earnings in January, and that happens to be the open where the stock pushed its way into its current overbought condition. A pullback to this level would be reasonable, but we see $68.40 as a better target to either look to take profits on a short sale or to consider going long after the news.

McCormick is scheduled to report earnings before the market opens on Tuesday, April 2, 2013 with a conference call at 8:00 AM ET. Statistically, the best trade for McCormick has come when the company beat the consensus earnings estimate but missed the MyRollingStocks® number and then opened lower on the news. This quarter, the consensus earnings estimate is $0.56 per share and the MyRollingStocks® number is $0.58 per share.

Greenbrier Companies

The railroad companies we generally follow are either right around their all-time highs or looking to break out to all-time highs. They’ve been able to do so without multiple expansion too as nearly all are trading right in-line with their average forward PE multiple over the past 15 years, which means the move has come with rising earnings estimates. The growing earnings provide the railroad companies with the ability to pay for new freight car equipment. We haven’t seen much of that growth trickle down to Greenbrier Companies (GBX), but that appears to be at the cusp of changing.

The data on the previous page for Greenbrier shows earnings estimates for 2014, which bottomed basically in February. The company had revamped one of its production lines to add capacity and that was resulting in flat earnings growth expectations for 2013 while the rail industry expanded and its railcar peers outperformed. Now the new production is beginning to come online and, in the meantime, the company has been gaining new orders and increasing its backlog. That’s why you see the increase in 2014 earnings estimates begin to move higher in March and that appears to be the beginning of a trend that should continue for several more months and quarters as the more recent orders bring the backlog to more than a full year’s production rate. About half of the recent orders have been for the higher-margin tank cars, which is part of the reason why Michael Baudendistel at Stifel Nicolaus recommended owning shares of Greenbrier ahead of its earnings release.

Greenbrier’s peer that has led the group has been Wabtec (WAB), and it is currently trading fairly close to its historical forward PE multiple of 15.8. Greenbrier has not commanded the same multiple as Wabtec in the past since it has historically traded at just 13.9 times forward estimates. But the stock still needs to get to $34 to trade at this historical multiple using current estimates – estimates that are expected to trend higher for the next several months and quarters – and that means the stock will need to increase by approximately 50%.

For the quarter, the consensus earnings estimate is $0.37 per share and the MyRollingStocks® number is $0.42 per share. Greenbrier is scheduled to report earnings before the market opens on Thursday, April 4, 2014 with a conference call at 11:00 AM ET.

Russell Reversals

Below is a list of upcoming earnings releases of Russell 2,000 companies that missed earnings estimates last quarter and traded down on the news. Buy the stock at the open after it reports earnings if it beats the consensus estimate and reports positive earnings (does not report a quarterly loss). Sell at the close of the next trading day.

A strategy of buying a Russell Reversal at the open following the earnings announcement and holding until the close on the second trading day would have averaged approximately a 58% annual return over the past 11 years.   A loss was made just under 40% of the time with an average decline of 4.15%, but there were more gains than losses and the gains were greater than the losses.

BlackBerry – the stock is not going to $0 any time soon and that means more people are wrong about this stock than ever before

Phillips Van-Heusen – vulnerable data, but favorable statistics and seasonality after earnings

Paychex – a potential short squeeze

Red Hat – downside risk

There are a lot of risks in the current market environment, with the most notable one being the Eurozone following the Cyprus. There is also the risk of the deeply oversold Japanese Yen that has a negative correlation with the U.S. stock market. We’ve touched on these in recent weeks and both need to be monitored closely, but one concern we’ve heard get tossed around a lot lately is the extreme bullish sentiment among investors, which is a contrarian bearish indicator. We are covering it this week though because we don’t believe sentiment is as much of a concern as others are making it out to be and, in fact, is more consistent with at least another push higher than it is with a selloff.

To start, one of our favorite measures of sentiment is the American Association of Individual Investors (AAII) as their sentiment survey tends to be a more accurate measure of extreme positioning of those that are most often on the wrong side of the market – or commonly referred to as “dumb money”. Early in the year, these investors became excessively bullish and they were right, but they quickly became spooked by the high prices and started to look for a selloff that never happened. If you look at the data we’ve provided in previous weeks of the Fed’s Permanent Open Market Operations and compare it with the data below, you’ll see that any time individual investors surveyed became as cautious as they are right now while the Fed was still pumping money into the market, it proved to be a buying opportunity for stocks.

But it isn’t just the small investor that has become cautious. The Investors Intelligence sentiment data, which comes from a survey of our fellow newsletter writers, shows that 34% expect a stock market correction. The last time more than 34% expected a stock market correction was right at the beginning of March when the S&P 500 was pushing through the 1,531 area. The survey showed 35% expected a correction in mid-November as the S&P 500 was bottoming around 1,350. So, with so many looking for a pullback, it makes it less likely we will get one. That may have added importance right now as we provide the POMO data on the next page. We’ve not updated it since late February, but it tells the exact same story through at least the end of April – the Fed will be providing more liquidity to the markets than at any time between stock market bottom in 2009 and the end of 2012, and when the Fed has been adding liquidity, we’ve yet to see a significant pullback in U.S. stocks.

We can also see in the next data of the National Association of Active Investment Managers (NAAIM) that portfolio managers have already scaled back their long exposure by more than 20% over the past several weeks. The overall long exposure remains high, but the last time we saw portfolio managers sell 20% of their holdings, the stock market was bottoming back in November. We’ve also seen some increase short selling, particularly in Consumer Discretionary and Technology where total short interest among Consumer Discretionary stocks within the S&P 500 is up 10.7% so far in 2013. This is another contrarian indicator that is not indicative of excessive optimism and market tops – even though the Consumer Discretionary SPDR (XLY) recently hit an all-time high.

Another area of sentiment that has been associated with bullish stock market activity has been in the U.S. Dollar index. While we remain Euro bears, which makes us net bullish the U.S. Dollar, we have to point out that sentiment has gotten extremely bearish other currencies such as the British Pound and the Canadian Dollar. The Canadian Dollar tends to rally with the “risk-on” mentality of investors and traders while the data of the Commitment of Traders data shows the net positioning of the large Commercial Traders (a.k.a. the “smart money”) against the positioning of the large speculators (the “dumb money”) is at its most extreme of the last five plus years. The previous two peaks in 2012 came with a 7.5% rally in the Canadian Dollar and coincided with a strong rally in U.S. stocks (at least in nominal terms). Therefore, with the exception of the Euro and perhaps the Yen, we believe it is time to start looking to look for the U.S. Dollar to decline and a rally in stocks along with it (depending on how the Yen trades).

Then, finally, while the stock market’s behavior last week was a little exhaustive – as if there were few buyers left – we continued to see stocks lift as the S&P 500 neared the three lines drawn on the data on the next page. These are the same three lines we had last week and we believe individually, each one has importance as they have shown where buyers have stepped in before. The fact that they all collide just below the present area suggests strong support underneath. … and the data on page one of this report shows Nasdaq stocks have become as oversold since the middle of February just before we saw a strong rally.

Therefore, we are maintaining our strategy of focusing on trading long around earnings as long as the S&P 500 remains above 1,531 and will hold some of our after-the-news long trades for an extended period while looking to take profits early and at key support areas for all after-the-news short trades.

BlackBerry

First, however, we need to bring up something that we’ve mentioned a couple of times with our discussion of Amazon.com (AMZN).  Sell-side analysts get paid to publish an earnings estimates, so they can be excused, but Amazon.com is spending so much money each quarter building its infrastructure, no one has any idea what they are going to report on the bottom line. This is our reasoning for not having an MyRollingStocks ® for Amazon the past four quarters, but that didn’t keep others from trying to speculate and publish estimates that differed from consensus estimates. It only showed that there was absolutely no research going into their numbers and, of course, they were grossly wrong. Those “expectations” were above estimates each quarter, but Amazon.com missed estimates each of those four quarters and the stock gapped higher on the news by an average of 7.1% each time.

The reason we are mentioning that with our discussion of BlackBerry (BBRY) this quarter is because we do not have an MyRollingStocks ® number for the company and we haven’t had one since this time last year.  The trend is lower and the company is likely going the way of NOK and PALM. We see it as a wild card this quarter after successfully trading it long on earnings last quarter for a short-term trade.”

After the company’s earnings release in late June of 2012, shares of BlackBerry to a $6 handle before the company reported earnings that September and short interest during that quarter increased from about 65 million shares to an average of about 85 million shares. Again, we didn’t have a MyRollingStocks ® number, but analysts checks remained weak throughout the quarter and most investors expected the trend to continue lower, but BlackBerry beat estimates in September and in December and the stock started to works its way higher. In fact, the stock rallied 17% on the news and more than doubled by its next earnings release.

The results, though, mattered little other than to show that the stock was not going to $0 any time soon. The main story is that the company has a completely new operating system that it just may license to other developers as an alternative to Apple’s (AAPL) iOS and Google’s (GOOG) Android operating systems. There are a large number of developers that have already created applications for the operating system, and BlackBerry has a catalog of new devices working its way through the system that, while checks have been mixed, are at least positive enough to show that the company is not going to $0 any time soon.

That’s where most investors now appear betting the wrong way because short interest didn’t bottom back in the second quarter when the stock was below $7. In fact, by the time the company reported third quarter results in December, short interest had increased to 113 million shares even though the stock had doubled. Now, the stock is still around $14 but short interest has increased still to 147 million shares. We believe those shorting the stock are doing so with the base case still that the stock is going to $0, but that is where we believe they are being proven wrong.

We have no idea what the company is going to report and we haven’t heard from anyone else that has any idea what the company will report. Anyone that is putting out numbers expecting a bottom-line miss or beat is just guessing without doing real research, but it most likely doesn’t matter. There are more people short this stock than at any other time even as the evidence for their case has gone increasingly against them since last summer.

Since we don’t know what to expect for the company’s results, we don’t know what to expect for the initial price action when it reports. However, we’ve been trading in and out of it over the past couple of weeks as we’ve been getting both positive and negative checks and we can tell you that it has become a great intraday trading vehicle where short covering becomes swift but steady and weakness tends to be a long slow drift. You should be able to see both of these moves as they begin and we suggest you trade accordingly with $14 showing to be the current trend line since the stock bottomed. The company is scheduled to report earnings before the market opens on Thursday, March 28, 2013 with a conference call at 8:00 AM ET.

Phillips-Van Heusen

Last quarter, Phillips-Van Heusen (PVH) provided fourth quarter guidance of $1.48 to $1.49 per share, which was below the consensus earnings estimate of $1.52 per share at the time. The weaker guidance was due to a negative impact from Hurricane Sandy, but analysts still believe the company will report above the company’s guidance with a consensus earnings estimate of $1.50 per share. In fact, estimates for next fiscal year have continued to move higher, helped with expected synergies from its recent acquisitions and that’s important because as long as the trend in estimates remains higher, then it is our view that the trend in the stock price will continue. Supporting this, we have a lot of statistics that say we will be rewarded by buying the stock after the news, but we have to be aware of a potential broadening top formation.

Perhaps the best thing going for the stock right now is seasonality. If you are going to buy shares of Phillips-Van Heusen after earnings, the best time to do it over the past 15 years has been in when it reports fourth quarter results in March. If you had bought the stock at the open when it reported fourth quarter results in the past and held it for a month, you would have averaged an 8.6% return. If you had bought after all the other earnings releases and held for a month you would have lost just over one percent.

Another item going in the company’s favor is it is expected to provide guidance for the new company after its acquisition of Warnaco and its continued improvement with Tommy Hilfiger. When the company has provided positive guidance in the past, it has gapped higher by an average of 2.59% and gone on to gain an additional 0.98% over the next two trading days. But it trades even better after the news when it beats the MyRollingStocks ® number and provided in-line guidance. Then it has averaged a gap higher at the open of 3.07% and then an additional gain over the next two trading days of 2.21%. The MyRollingStocks ® number is $1.54 per share.

Phillips Van-Heusen is scheduled to report earnings after the market closes on Wednesday, March 27, 2013 with a conference call scheduled for Thursday morning at 9:00 AM ET.

Paychex

One of the problems with looking at seasonality during the month of March is that one of the comparisons is March 2009 when the overall stock market was bouncing off a panic low. Paychex (PAYX), for example, provided negative guidance when it reported results in March of 2009 but the stock gapped higher by 3.09% and gained an additional 6.28% throughout the day. Two weeks later it was up an additional 4.64%. If you take that month out of the numbers, then the stock has averaged a gap higher of 0.66% at the open, a gain of 0.45% on the day before closing the week higher by 1.43% and the month higher by 2.52%. So the results are positive, just not so heavily skewed to the upside.

One thing that may help shares of Paychex this quarter is the short interest. As we mentioned in our top-down analysis, we have been seeing an increase in short interest among some stocks that is indicative of a buying opportunity rather than the top that some sentiment indicators suggest. Back in September when shares of Paychex were putting in their 52-week high ahead of earnings, short interest in the stock was 12.0 million shares. The stock has made it right back near this level but now short interest is up to 19.4 million shares. At least a 1/3 of those short, which makes up two days of the stock’s trading volume, have a loss in their position and a move above $34.70 would mean all 19.4 million shares will be held at a loss. This is for a company whose peer, Automatic Data Processing (ADP), has already broken out to new all-time highs. Also, we should note that the stock has spent much of the past three years hitting its head against $33.70, which was support for the stock back in 2006, and each pullback has had a higher-low. The stock has spent much of March fighting through this level. A move that holds above this level would have longer-term upside room to the $42 to $45 area – or basically back to where the stock peaked in 2007.

Paychex is scheduled to report earnings after the market closes on Wednesday, March 27, 2013 with a conference call at 10:30 AM ET on Thursday, March 28. The consensus earnings estimate is $0.39 per share and the MyRollingStocks ® number is $0.40 per share.

Red Hat

Oracle (ORCL) missed expectations last week and the stock sold off on the news. Shortly after the market opened, we tweeted that the negative read through in the Oracle news was Red Hat (RHT). One of the most common operating systems used by those using Oracle’s database is Red Hat’s Linux. So, when Oracle’s sales are weak, then it often suggests weak results by Red Hat. Oracle fell short of revenue expectations by $150 million due to weak license and cloud subscriptions – that’s the basis for the secular story in Red Hat at the moment. We don’t have a lot of examples of Oracle missing numbers like it did last week, especially prior to Red Hat reporting results for the same quarter, but the two times it did, shares of Red Hat closed down by 4.30%. Red Hat is scheduled to report earnings after the market closes on Wednesday, March 27, 2013 with a conference call at 5:00 PM ET. We’ve lowered the MyRollingStocks ® number a penny from $0.31 per share to be in-line with the consensus earnings estimate of $0.30 per share, but the risk is in the guidance. Michael Turtis at Raymond James said he expects the company to provide disappointing revenue guidance for the quarter.

Still, how we tend to prefer to trade such news when two closely related stocks report earnings so close within each other’s date is to assume the news is in the stock by the time it opens after the report. In this case, that means trading long shares of Red Hat on a gap lower following its earnings release. The problem here is that it means the stock will break below the trend line from the November low – or below $50 and that has near-term technical downside room to around $46 or even lower … perhaps as low as $37. Therefore, we need to see where this stock opens on Thursday.

• Foot Locker – estimates trending higher
• PETsMART – positive trends at risk
• Kroger – positive data getting priced in
• Delek – positive trends and price action

Last week we said the most important data point was not the expected upward revision to GDP, the ISM Manufacturing data, or any of the other key traditional macro data points. Rather it was the Fed’s schedule of Permanent Open Market Operations for March. On Thursday we got confirmation of what we really already knew – that the Fed was going to continue to support the market in March. One thing we’ve seen this year is that the stock market has had some of its weakest days when the Fed was not in supporting the market, and the Fed’s schedule tells us our days of potential downside risk are Friday, March 8 and Wednesday, March 20, 2013. All the other days in March will see the Fed adding at least $1.0 billion in liquidity to the markets with the greatest contribution coming on Friday, March 15, 2013.

That date is important because, as we pointed out a couple of weeks ago, there is bearish seasonality until the middle of March. Therefore, we believe a selloff over the next two weeks would create a very nice buying opportunity. The sentiment coming from small investors as surveyed by the American Association of Individual Investors support buying weakness over the next two weeks.  This is one of the steepest reversals of sentiment among what is commonly referred to as the “dumb money” while the stock market was near a high that we’ve ever seen. This is a contrarian indicator that suggests any selling from here will be short-lived. That drop in sentiment has come while earnings and revenue growth numbers are accelerating and we had a spike in the ISM New Orders last week.

The percentage of companies reporting revenue for the quarter ending in January 2013 is right around its highest level over the past year and when we look at the similar data for those reporting year-over-year earnings growth we see the percentage is higher than it was at any time in 2012. Other than high optimism that by some measures is at an extreme, everything seems to be pointing in the stock market’s direction right now… and even optimism is fading, making for bullish conditions.

One example of optimism fading is in the put/call oscillator. When investors are leaning on the bullish side, they buy calls and when too many people are leaning in on the bullish side at the same time, it can signal a peak in stocks like it did in September. The opposite is true too just like back in June. Right now, the trend is consistent with bearish price behavior in the near-term but we’ve yet to see that yet even while investors prepare themselves for weak prices. By the time the put/call oscillator reached this level back in November, stocks had already bottomed. Therefore, while we aren’t at a signal yet, it shouldn’t take much stock market weakness to tip this over and put a floor underneath the market – especially with the Fed providing so much support.

For this week, resistance in the S&P 500 is around the 1,524 area, but eventually one of these two lines are going to fail. We believe stock prices are going higher, but they need to see some selling first. So, for now, we are maintaining our strategy of trading both long and short around earnings while looking to take profits early and at key support/resistance areas for all after-the-news trades.

Foot Locker

A simple truth about retail is that when sales begin to slow, stores are quick to run specials, discounts, etc. So a sign of strong sales is higher prices. That’s why there is such a high correlation in the Consumer Price Index (CPI) for footwear and shoe retailers like Foot Locker (FL). If footwear prices are going higher, then it usually means shoe sales are strong. The CPI for footwear has ticked higher for six straight months to a new all-time high as of January 2013. The CPI is up approximately 0.9% from where it was in October and is 4.8% higher than it was in January 2012. It just so happens that Foot Locker is getting ready to report results for its fiscal fourth quarter, which ended in January. So it is an important sign that footwear prices increased each month during the quarter – an important quarter at that where the company has historically sold the most. On the chart of the CPI and Foot Locker’s stock, there is a lag as the stock reflects prices as of March 1, 2013 and the CPI is dated in January, so perhaps the CPI is about to roll over, but for now it is at an all-time high which supports the stock going to a new high.

Of course, the CPI measures all footwear prices, not just what Foot Locker sells, but as we pointed out ahead of Finish Line’s (FINL) earnings release in January, athletic footwear is where the strength is but specifically it is basketball footwear that leads. Finish Line’s CEO said in January they saw “a slowdown in running and a pickup in basketball”. Foot Locker is one of the primary beneficiaries of this trend. As Foot Locker CEO Kenneth Hicks said last quarter “we know a little bit about basketball”. Furthermore, according to Foot Locker CFO Lauren Peters, basketball is becoming increasingly important in Europe and they are at the beginning stage of this growth where Foot Locker excels. Mitch Kummetz at Robert W. Baird said they expect basketball shoe trends to drive upside to estimates and Robert Ohmes at Bank of America-Merrill Lynch said he believes Foot Locker “likely trended well ahead” of estimates led by basketball. Taposh Bari at Goldman Sachs also said strong basketball sales should result in upside to estimates for Foot Locker.

Furthermore, Sam Poser at Sterne Agee & Leach and Paul Trussell at Deutsche Bank both said they recommend owning shares of Foot Locker into its earnings release on the possibility of an upside earnings surprise. The consensus earnings estimate is $0.72 per share and the Rolling Stocks number is $0.78 per share.

On the chart below for Foot Locker, we see earnings estimates that are trending higher and an earnings beat should push those up to new highs. As estimates have trended higher, so has the stock but has consolidated since the September high. What we don’t show on this chart is that this consolidation has come after a breakout above a multi-year top at $30 from back in 2005. We can make the case that this has a longer-term upside move to the $47 area on a breakout, but for now the stock needs to push above $35 to confirm the breakout of consolidation. There is resistance around $36, but the fundamental trend suggests a move at least back to the $37.50 area and probably to new highs on an earnings beat. Trend line support is around $32.

Fundamentally, the stock has averaged a forward PE multiple of 13.1 over the past decade and a half and using current fiscal year estimates, this implies a price of $37. Those estimates are expected to go higher, supporting the stock going to new highs, but after the company reports, investors will begin to look towards the fiscal year ending in January 2015, where estimates currently sit at $3.11. Slapping the 13.1 multiple to next year’s estimates suggests the stock should be able to work its way up to near $41 using current estimates and even higher if the company beats estimates.

Foot Locker is scheduled to report earnings before the market opens on Friday, March 8, 2013 with a conference call at 9:00 AM ET. Foot Locker is an Earnings Whisper Play for Monday, March 4, 2013 for a long trade ahead of its earnings on Friday.

Foot Locker – estimates trending higher

PETsMART

Like Foot Locker, estimates for PETsMART (PETM) have been trending from the lower left to the upper right and there is a trend line intact for the stock that parallels the estimates. The problem is in January the stock sold off on heavy volume due to a downgrade at Nomura Securities. That’s not too much of a concern other than it creates strong resistance overhead, but the bigger problem is that checks appear to have weakened during the month of January. We’ve lowered the Rolling Stocks number modestly to $1.22 per share, compared to the consensus earnings estimate of $1.21 per share and the company’s guidance of $1.16 to $1.20 per share. Denise Chai at Bank of America-Merrill Lynch said management’s performance and execution give way for a potential upside surprise and protect it against competition both at the store and online. Arum Rubinson at Nomura, on the other hand, said there is potential weakness with online sales and management changes put execution at risk.

PETsMART is scheduled to report earnings after the market closes on Wednesday, March 6, 2013 with a conference call at 4:30 PM ET.

PETsMART – positive trends at risk

Kroger

When Kroger (KR) reported earnings back in November it said it expected fiscal year earnings of $2.44 to $2.46 per share, which was above the consensus earnings estimate of $2.41 per share at the time. Joe Feldman at Telsey Advisory Group said Kroger continues to execute and he expects the company to report at the high-end of the company’s guidance range, but toing into the fourth quarter earnings release, which will natural include results for the fiscal year, the consensus earnings estimate stands at $2.47 per share – a penny above the company’s guidance. If you buy a stock three days ahead of its earnings release if provided positive guidance last quarter and estimates were revised above the company’s guidance range, then you would average a gain of 1.65% if you held it until the open following the news. This comes to an annualized gain of approximately 100% without factoring in commissions, so that is statistically favorable going into its earnings release.

Analysts tend to be conservative with their estimates, so when they have a consensus above the company’s guidance, it usually means there is strong conviction that results will be good and that usually means there is upside. That is certainly the expectation this time as the Rolling Stocks number is $0.73 per share – above the consensus estimate of $0.70 per share. This expected upside surprise had us originally schedule for Kroger as an Rolling Stocks Play ahead of earnings but when it came to trade it we removed it due to the stock trading at a 52-week high. This does not mean the risks shift to the downside merely because the stock has rallied into the news, it just means there is less upside potential and the risk/reward has shifted.

Of course the company’s guidance will be important for the next fiscal year, but that $0.73 whisper has statistical relevance too. In the past, when Kroger has beat the Rolling Stocks number and opened higher, it went on to gain an additional 1.19% over the next two trading days, but when it has reported in-line or worse while also beating the consensus estimate, it then traded down an average of 1.12% over the subsequent two trading days.

Kroger is scheduled to report earnings before the market opens on Thursday, March 7, 2013 with a conference call at10:00 AM ET.

Kroger – positive data getting priced in

Delek US

The best thing about getting through the busiest part of earnings season is we get to see results and price action of a large number of companies and use it as a guide for like companies reporting in the future. For example, Western Refining (WNR) made our Russell Reversal list after pulling back from a multi-year high and an overbought condition. The results were strong and so was the price action. It is hard to see much of a difference between Western Refining and Delek US (DK) and their charts are nearly identical. So after we saw Western Refining results and price action on Thursday, February 28, 2013, we had confidence in Delek as an Earnings Whisper Play to trade long ahead of earnings.

Both stocks have only been trading since 2007 and the only time Western Refining beat estimates and traded higher on the news prior to Delek’s earnings release, Delek went on to gain 27% from the tree days prior to its earnings release until the close two days following the news.

Delek is scheduled to report earnings after the market closes on Wednesday, March 6, 2013 and the consensus earnings estimate is $0.95 per share. The Rolling Stocks number is $1.09 per share. A conference call is scheduled for Thursday morning at 11:00 AM ET.

Delek – positive trends and price action

Anaren designs, manufactures and sells complex microwave components and subsystems for the wireless communications, satellite communications and defense electronic markets

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Market Recap

Stock market averages fell early, rebounded into midday, and trading has slowed to a crawl heading into the final hour Friday. Most of Asia's and Europe's equity markets moved lower on disappointing PMI data, along with ongoing concerns about the outlook for the global economy, as $85 billion in government spending cuts in the US are ready to kick in. However, better-than-expected Consumer Confidence and Manufacturing numbers seemed to help offset some of the worries about the so-called "sequestration." The University of Michigan reported that its index of consumer sentiment was up to 77.6 in February, from 76.3 earlier this month and better than the consensus estimates of 76.3. ISM Index (manufacturing) was up to 54.2 in February, from 52.4 and better than the 52.4 that had been expected. Post-earnings gains in Best Buy (BBY), Decker Outdoor (DECK), and Gap Stores (GPS) possibly helped investor sentiment as well. The auto-makers, GM and Ford (F), are also ticking higher on the heels of their respective monthly auto sales reports. Meanwhile, the Dow Jones Industrial Average held a 20-point gain midday and is now up 40. The NASDAQ is up 7.7 points in spite of further losses in Apple (APPL). The stock is down another $10.24 to $431.25 and falling to new 52-week lows.

The downside risk is limited, but we see an oversold bounce that should be sold for a better buying opportunity later.

• priceline.com – positive checks, first quarter ad spending guidance the key
• Magna – showing strength
• Dollar Tree – a base forming, but little evidence yet
• ACI Worldwide – positive trends and strong growth

As we pointed out last week, there are some strong seasonal trends pointing to weakness in U.S. stock prices for the next few weeks from the high set last week. We’ve also seen some weak economic data recently in an environment that already saw negative GDP in the fourth quarter ahead of the Super Committee’s budget sequester, which begins on March 1st and promises to subtract 1% to 2% from GDP in the second quarter of 2013. While fourth quarter 2012 GDP looks to get revised higher, we are still faced with a very real risk of three quarters of negative GDP. This is not, by definition, a recession, but we’ve never seen three quarters of negative GDP growth in the post-World War era without being in a recession.

Identifying recessions and economic contractions is important to us because it means contracting earnings and revenue, which have proven to be very highly correlated to stock prices; but also during recessions investors 1) don’t have as much money to invest in stocks because their incomes are lower or 2) need to sell assets to pay for other things, such as mortgage payments and business operations. There are simply more sellers than buyers of stocks during economic contractions.

As we have mentioned before, there is a common saying among old-time stock market technicians – the only thing that matters to stock prices is how much money is available and how that money wants to be put to work. That’s why we started the year basing our trading outlook with the Fed’s Permanent Open Market Operations (POMO) activity since late 2005. While earnings have historically shown to have the best correlation with stock prices, during the current secular bear market, the Federal Reserve’s balance sheet has shown to be even more highly correlated.

Up until the early part of 2007, the Fed as expanding its balance sheet through its open market operations and shortly after the Fed’s support stopped, stock prices peaked. Then, during the late spring of 2008, the Fed pulled out $135 billion from the market and stock prices collapsed. Then, as the panic ensued, the Fed came back into the market with approximately $75 billion per month with what is now referred to as Quantitative Easing 1. As soon as this ended in 2010, markets sold off until the Fed stepped in to support the market again. Later, the Fed implemented QE2 and, even though the Fed never completely ended support of the market, the stock market sold off again as soon as QE2 ended. Then the Fed implemented Operation Twist where it bought long-term Treasuries and sold short-term Treasuries …and the periods of buying showed to be favorable to markets while the periods of selling saw a decline in stock prices. Now the Fed is implementing both QE3 and QE4 at the same time with $40 billion in mortgage-backed securities each month and another $45 billion in U.S. Treasuries. This is the greatest expansion of the Fed’s balance sheet we’ve seen – more than $10 billion more per month than we saw during the depths of the 2008/2009 recession.

That means that even though we are at risk of seeing negative economic activity that normally creates stock market selling, there is still plenty of new money coming into the market that has to be put to work somewhere.

We currently know what the Fed will during through Thursday. It will add at least $1.25 billion to the markets with around $5.0 billion coming on Wednesday. This comes during a very busy week of economic data with mixed expectations, but perhaps none of the items on the schedule are as important as the Fed’s schedule of operations for the month of March. All indications are that we’ll see more of the same though and that means we need to be buyers of weakness. The question is when.

We said last week in our Alerts & Notes section after the selloff in stocks that we expected stocks to bounce and we expected that bounce to push up near the recent highs, but to fail to push to new highs before rolling over again. That bounce came on Friday and brought the S&P 500 right back into the two lines we’ve deemed most important right now. This puts resistance around 1,524 with the first support around 1,509 but with stronger support around 1,496.

Until we get a clearer picture, which we believe will develop in mid-March, we want to trade both long and short around earnings. We have to be careful shorting for more than a day, because we’ve never before seen the amount of support to the markets that the Fed is providing, but we believe we can lean more heavily on the short side with the S&P 500 around the 1,524 line with confirmation below 1,509 for an eventual move below 1,496. We saw the market reach an oversold level and we want to continue to trade long off oversold levels for at least the short-term, but we are looking for a deeper oversold condition than we saw last week and, ideally, will then see another lower-low with improving breadth data around the middle of March for a buying opportunity.

priceline.com

Last May, priceline.com (PCLN) beat consensus estimates and provided in-line guidance, but reported results below the My Rolling Stocks Number. The stock sold off on the news and created a resistance line that held throughout the quarter. In August, the company provided negative guidance and the stock gapped lower on the news, but then created a double bottom before beating expectations in November. Now the stock is right back around where it was last May. Support is around $670 and a breakdown below this level after the news would suggest greater downside, but there could be plenty of resistance overhead. A move above $707.50 is at least needed to suggest any real upside.

That also means the quality of the results are important – especially since the longer-term estimates are still not back to where they were back in May, which means the stock is more expensive even though the trend in estimates is higher.

The concerns keeping the stock from going higher are not based on revenue. The industry and priceline.com specific checks have come in above expectations during the quarter and that puts whispered expectations around $1.25 billion vs. the consensus revenue estimate of $1.19 billion. The concerns, and the mixed expectations, surround margins and the bottom-line results. Stephen Ju at Credit Suisse said he believes investors are underestimating priceline.com’s management and Justin Post at Bank of America-Merrill Lynch said the buy-side analysts are looking for earnings in the $6.70 to $6.80 range, which he believes is achievable. Our objective is to publish the buy-side expectation and compare it to the sell-side, and the My Rolling Stocks number is $6.75 per share while the consensus earnings estimate is $6.54 per share.

Another concern is first quarter guidance, where the company’s ad spending could pressure margins in the first quarter but help the second and third quarters. Naved Khan at Cantor Fitzgerald said he sees this guidance around ad spending to be the key and believes it will generally be in-line with expectations. Mr. Post believes guidance will come in below estimates due to ad spending, but the company will eventually outperform and believes weakness on the news will present a buying opportunity ahead of a strong second quarter.

priceline.com is scheduled to report earnings after the market closes on Tuesday, February 26, 2013 with a conference call at 4:30 PM ET.

Magna International

One group that has reported positive results recently is the automotive group and that includes the automotive suppliers. Since one general trading rule is to buy strength and sell weakness, it is important to note that Magna (MGA) has shown the greatest strength of the automotive suppliers. While it has shown strength, it is also trading near a multi-week low and that, combined with favorable trends and positive analyst checks, provides a statistically favorable trade ahead of its earnings release – not as favorable as if the stock was trading around $47, but our analysis gives the stock a 65% chance of trading above its opening price this morning after it reports earnings with an average overall gain of 2.31%.

The current consensus earnings estimate is $1.14 per share and the consensus earnings estimate is $1.25 per share. The company is scheduled to report earnings before the market opens on Friday, March 1, 2013 with a conference call at 8:00 AM ET.

Dollar Tree Stores

In early October, Dollar Tree (DLTR) narrowed its guidance to the low-end of its previous range ahead of its November earnings release. The stock traded down on heavy volume but has since formed a rounded base with heavy volume at the lows. The base comes at a price below where the stock was this time last year and, even though they were revised lower last fall, remain above where they were this time last year – bullish divergence making the stock cheaper than it was last year at the same price. This suggests strong support underneath and a move that holds above $42 has near-term upside to the $47.50 area.

The problem is we’ve yet to see good numbers from any of the discounters and and Dollar Tree is up against its toughest comps of the year (though there is an extra week this year). Until the company shows good numbers, primarily with margins, there just isn’t evidence that the stock can have a sustainable move higher yet. That said, buyers are stepping in at $38 and estimates are at the low-end of the company’s guidance, which are viewed as beatable. The company’s management has a strong track record and it is the best of bread. The consensus earnings estimate is $0.99 per share and the My Rolling Stocks  number is $1.02 per share.

Dollar Tree is scheduled to report earnings before the market opens on Wednesday, February 27, 2013. A conference call is scheduled for 9:00 AM ET.

ACI Worldwide

There is a strong secular story behind electronic payments that has little end in sight. The entire group is expected see solid growth next year and in the years ahead, but ACI Worldwide (ACIW) is expected to double earnings in 2013 and that alone boosts the odds the stock will trade higher on earnings.

The company is also expected to grow earnings by approximately 30% in 2014, yet the stock is only trading at 20 times 2013 earnings estimates. After the company reports earnings, the stock with 30% estimates growth next year and 100% last year will be trading at 16 times 2014 estimates. The stock has historically traded at 21.8 times forward estimates, so looking out to 2014 after 2012 results are reported, the stock will need to get to $64 to reach its historical valuation and then it will still have a PEG ratio of less than While ACI Worldwide is our favorite of the group, we’ve yet to see the price action from its peers that suggests buyers are stepping into the names at this point. Therefore, we prefer to wait for weakness or to see a favorable move on the earnings news that are expected to be solid, but perhaps not great.

There is support at $46 and at $44 and as long as the company doesn’t disappoint, we would look to be buyers on a move that holds at either of these levels. The company is scheduled to report earnings before the market opens on Thursday, February 28, 2013. The consensus earnings estimate is $1.14 per share and the My Rolling Stocks number $1.16 per share.

Newfield Exploration Co. (NFX, $24.75, -$2.55, -9.34%) declined after reporting a massive fourth-quarter loss, driven by a $1.5 billion non-cash ceiling test write down associated with the carrying value of its domestic proved reserves. Analysts at Jefferies noted the adjusted per-share earnings were well below analyst views, and cited higher depreciation, depletion and amortization as being the cause.

The following is a press release from Standard & Poor's:

 We project that The Woodlands, Texas-based oil and gas exploration and production company Newfield Exploration Co.'s credit metrics will be relatively weak for the current rating over the next one to two years.  The company recently announced its intention to sell its international operations, with the proceeds to be used to fund higher capital spending in the onshore U.S.  We are revising our rating outlook to negative from stable, reflecting uncertainties regarding the timing and proceeds from planned asset sales, and the risk that credit metrics could remain subpar for longer than we are currently anticipating.

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Market Recap For Monday

Stock market averages moved higher early Monday, but the rally fizzled and then sizeable losses were suffered on concerns about elections overseas. With no domestic economic news scheduled until home sales and consumer confidence tomorrow morning, some of the early focus was on the turmoil in Europe. Indeed, the euro took a decided turn for the worse against the dollar amid increasing uncertainty surrounding elections in Italy. According to the most recent reports, a hung parliament seems to be the most likely outcome from the elections and that, in turn, could potentially get in the way of unpopular reform policies designed to offer stability to the Eurozone. The euro, which had traded north of 1.33 early, was recently down to 1.305 against the buck. Treasury bonds finished sharply higher and gold gained $21.7 to $1594.5 amid flight safety buying. Crude oil is down 27 cents to $92.86. On Wall Street, the Dow Jones Industrial Average tumbled 216 points and the NASDAQ dropped 45.6 points.

QUALCOMM – a longer-term trading strategy for a Fed-driven market

TASER – tailwinds are building

Newmont Mining – a laggard

 Wal-Mart – there is downside risk

 HEICO – some upside risk

Kadant – some upside risk

Price Trend

There was a day in late January 2013 when the overall stock market sold off. This was unusual because it was one of the only days during the month that we saw stocks decline. We said at the time that we did not believe it was merely a coincidence that it also happened to be one of the only times during the month that the Fed was not adding liquidity to the markets. We pointed out last week that Friday, February 15, 2013 was the only time during the month of February that the Fed would not be adding liquidity to the market and we do not believe it is just a coincidence that the overall stock market fell.

Our basic view for 2013 is based on the fact that the Fed’s balance sheet has the highest correlation with U.S. equity prices and in 2013 the Fed is going to expand its balance sheet like we’ve never seen before in history. If we are going to see the market let off some steam, it is most likely to come on days when the Fed is absent, and the only day during the month of February the Fed is not supporting the markets was Friday. The rest of the time, we have to have the basic view that weakness should be bought because we know approximately $2.5 billion in new money is coming into the market every other day this month from the Fed alone.

Historically, though, the top correlation with U.S. stock prices has been corporate earnings, and even if the Fed’s balance sheet is going to go up in a straight line, we have trouble accepting that stock prices will go up in a straight line for all of 2013. For the first six weeks of 2013 we not only had the Fed providing a tailwind at our backs, but we also had improving earnings relative to the previous quarter as we previewed at the beginning of the year, and we had normal seasonality in our favor.

From here until the middle of March, if you had bought a stock three days ahead of its earnings release and held it until the close two days after, you would have lost money on average. While it didn’t prove to be much of a roadmap in 2012, most of the major turns in the overall stock market in 2011 coincided with this seasonality and so far this year, the chart appears to be lining up. With the overall stock market technically overbought and optimism near an extreme, it seems reasonable to follow this guide until we are shown we are wrong. 

That’s not the only seasonal pattern that says to sell this week. We tend to see rallies into the middle of July after a new President takes office after a dip in late winter. When the first year of the cycle has a second-term President, then stocks tend to peak in mid-February and bottom in mid-March. This is the exact same signal shown by the pattern of earnings releases this time of the year.

Of course, it is one thing to set up a plan and a strategy, but we first need to see evidence that we are right. The chart below gives us some initial evidence as breadth has been negative while stocks pushed to new highs, but with $2.5 billion of new money coming into the market every day, we need to see evidence that there is more selling than this new money is buying. Therefore, we are going to become more neutral this week and dabble a little more on the short side, but maintain a long bias until we see actual selling. For now, that means a move below 1,515 in the S&P 500.

We are short-term traders who generally hold a position between one to five days using strategies that have shown to be correct, statistically, nearly 65% of the time and where the profits are greater than the gains. Of course, that means we are going to be wrong just over 35% of the time and for every six or seven double-digit gains, you should expect to have a few double-digit losses. That’s just the nature of trading.

All of our strategies factor in three things: 1) the earnings, 2) the price action, and 3) the time. Considering the Fed is going to expand its balance sheet by $1 trillion (with a T) in 2013 and still has approximately $875 billion to go, we believe it is reasonable to look for longer-term strategies. Of course, when we trade in the short-term on a catalyst such as earnings, we take away some of the broader market risk and when we use a strategy that averages a 1.25% gain over three trading days, then we get an annualized return of approximately 100% after factoring that almost 30 of the 80 trades will be losses. That assumes only one trade at a time, doesn’t compound results, and doesn’t factor in commissions.

There are a lot of things we can buy that will probably make us 1% or so per month if the stock market is going to move higher with the Fed’s balance sheet, but to be worth our effort to trade with a longer-term strategy, we need to look for trades that will annualize to a return on par with our short-term strategies.

One strategy that factors in earnings, price action, and time is to buy stocks on positive earnings news that gap to a level above the previous quarter’s high and hold it until the day before the next earnings release. We often see companies beat consensus estimates but miss the Word on the Street   number, but without guidance, analysts lower their earnings estimates. If we only use news that results in raised earnings estimates (i.e. a  beat or positive guidance), these stocks gain 5.41% over approximately 90 days. This comes to an annualized gain of approximately 21.6% before commissions and considering this comes during a decade and a half long period where the S&P 500 is basically flat, this is a simple strategy worth looking at. But the meat of these gains comes from the 19% of the stocks that never fill the gap from the previous quarterly high and gain 19.37%. The other 81% fill the gap but still close up 1.89% from the open following its earnings release until the day before it reports its next earnings release.

A trade that has better statistical returns comes from this 81% that fill the gap because 62.6% of these still close above the previous quarter’s high on the day before they release their next earnings release. The 62.6% that close higher gain 14.16% once they fill the gap and move higher and because they tend to take about a month to bottom out before going higher, you can hold the position for approximately two months. If you simply wait for a stock to fill the gap from the previous high and buy, then you’ll average (based on past results) a gain of 4.88% over a two-month period, which comes to a 29% annual return.

Even here though, we don’t know which ones will go lower and which ones will move higher, because only 17% of these hold here at this first support level, but those gain 17.82% up until the next earnings release, so using the previous quarter’s high as support creates a favorable risk/reward for a longer-term trade.

For example, we’ve mentioned two stocks so far this reporting season that we believe are important stocks to own in 2013. One being ARM Holdings (ARMH) and the other being QUALCOMM (QCOM). QUALCOMM beat the Word on the Street   number and, while it remained in-line with consensus estimates, raised its earnings guidance. As a result, estimates were raised on the news and the stock gapped above the $65.50 level. This level was the high last quarter and the quarter before that, proving to be an important resistance line. Now, however, the stock has pulled back to fill the gap.

In every after-the-news earnings trade, we draw lines and discuss important resistance and support areas, and what makes this longer-term trade so attractive is that we have a clear line of support to use where we can limit out downside and still capture the upside. We might have some small losses trying to see if support holds, after all, as Dr. Alexander Elder said in his book Come Into My Trading Room, “… support and resistance are flexible – they are like a ranch wire fence rather than a glass wall. A glass wall is rigid and shatters when broken, but a heard of bulls can push against a wire fence, shove their muzzles through it, and it will lean but stand.” Stocks such as QUALCOMM might fail to hold at support, but they also might stretch support before holding, so a move above $65.50 should be bought with stops just below because the average gain above this support level on the day before the next earnings release is worth taking putting stops just below.

Even if this level fails to hold and the stock goes on to fill the gap from the previous close, as the majority do, this only provide a second trade opportunity with limited downside risk but very strong upside room. Of these that fill the gap to the previous close, 61.3% still go on to trade higher into the next earnings release and those that do close 13.56% for a trade lasting approximately two months.

On the chart for QUALCOMM, we’ve provided the next fiscal year’s estimates, so after the November earnings release it shifted from fiscal 2013 estimates to estimates for the fiscal year ending in September 2014. This is different than our normal chart because we wanted to show how much cheaper the stock is now after a year of basically no movement in the price, but the key is that estimates moved higher. Now that the gap has been filled, a move above $65.50 with a stop just below creates minimum downside risk in the stock with a potential annualized gain of 100% by the time it reports earnings in April. If we get stopped out, we can reenter here later, or make a similar trade at $63.50 where the average annualized gain is 81% with minimal downside risk if placing a stop just below.

TASER

We provide most of our trades on our website and in our morning emails and we use this weekly newsletter to discuss the trading environment, important setups, and expectations for heavily followed companies. When it comes to politics, we do not believe it is our view to give our views and beliefs, but rather to stick our finger in the air and determine how to make money based on the political backdrop. Time magazine once referred to President Obama as the salesman of the year for the gun industry and we’ll leave that statement alone other than gun companies were seeing strong trends nearly each month and shares of Smith & Wesson (SWCH) were a favorite trade of ours around earnings throughout 2012.

Then the horrible shootings in Connecticut changed the political environment and it appears certain that some kind of gun control is coming. That is probably a bullish sign in the near-term for Smith & Wesson and consumers buy ahead of potential bans and restrictions, but the longer-term winners are likely companies such as TASER (TASR).

TASER has already seen favorable trends over the past couple of quarters and has tracked well this quarter, with an Word on the Street   number of $0.09 per share – above the consensus earnings estimate of $0.07 per share. Shares of TASER have already hit a 52-week high during the quarter, so a strong surprise is needed for the stock to get above $9.50, but the stock still has favorable odds through its earnings release, and the longer-term trend is likely higher. Throw in an environment where guns are limited, and an alternative form or protection has added upside.

TASR

On the chart, there is near-term trend support at $8.25 and stronger support at $7.50, but as long as estimates continue to trend higher, then the stock should continue to make new highs. TASER is scheduled to report earnings before the market opens on Thursday, February 21, 2013.

Newmont Mining

We don’t use Twitter much, but have recently decided to start tweeting trade setups that have favorable statistics and risk/rewards but don’t make it on our play lists. For example, the Fed is pumping money into the market at a pace of $2.50 billion a day and stocks are drifting higher. That is not something we want to generally short against until we see price action weaken. If we were bearish the market, we would have set Newmont Mining (NEM) as a Short Play ahead of its earnings release this week on an expected earnings miss and a potential violation of a long-term support as estimates trend lower. Instead of making it on our play list, we tweeted it. On Friday after we tweeted it, the stock gapped lower by 1.68% and then traded lower by an additional 1.21% and touched below $43. Below $43, we have a near-term downside target of $40 and a potential downside move to $28.

The stock trades partially with the price of gold, but the fundamentals are much worse than a decline in the price of gold. The company is set to produce less gold during the quarter than it did during the same period last year and sell less than it has produced, meaning sales are down and inventories are building. At the same time, the cost to produce gold is up. That makes for weak results with downside risk to estimates.

NEM

The consensus earnings estimate is $1.00 per share, but the Word on the Street   number is $0.96 per share. The miss should push estimates lower and as long as estimates trend lower, we view the stock as a value trap. The company is scheduled to report earnings after the market closes on Thursday, February 21, 2013 with a conference call on Friday at 10:00 AM ET.

Wal-Mart

As we’ve pointed out a few times already this year, the second half of February and the first half of March is seasonally bearish for stocks when it comes to trade on earnings. This period is heavily weighted with companies that closed their books at the end of January rather than the end of December… and this tends to be Retailers and Consumer Discretionary stocks. The largest is Wal-Mart (WMT) it has definitely added to the downside movement. It isn’t that Wal-Mart is down all the time, it is only down in the month of February around earnings 50% of the time. The problem is that the declines have been greater than the gains, including a 5.82% decline last year and a 3.49% decline the year before.

We measure this move from three days prior to its earnings release until two days after its earnings release and, since Wal-Mart is scheduled to report earnings before the market opens on Thursday and the market was closed on Monday for President’s day, this includes the price action from Friday.

On Friday, Jerry Murray, Vice Preside of Finance and Logistics at Wal-Mart, sent a corporate email saying “In case you haven’t seen a sales report these days, February month-to-date sales are a total disaster… the worst start to a month I have seen in my seven years with the company.” Shares of the stock closed down 2.15% on Friday.

WMT

Going into the earnings release, this news seems to give little hope that the stock will rally ahead of the news, and it has brought down expectations as well. The Word on the Street  number has gone from $1.58 per share to $1.56 per share while the consensus earnings estimate remains at $1.57 per share.

As we’ve discussed before, we believe Wal-Mart has broken out from a long-term base and we doubt we’ll see the stock below $63 again, so the closer we can get the stock near $63, the better we believe our chances of a favorable trade on the long side will be. In the meantime, the risk appears to be to the downside ahead of the news and likely after the company reports.

HEICO

HEICO (HEI) also has averaged a decline on earnings during the month of February, but that’s almost entirely due to a decline in February 2009 just before the market fell towards its panic low a couple of weeks later. This quarter, we’ve seen the Aerospace industry perform well and companies such as Teledyne Technologies (TDY) and B/E Aerospace (BEAV) have all traded higher on earnings to a new 52-week high. That’s good news for shares of HEICO since its stock has recently tested its 52-week high but has yet to push through it.

In fact, every time B/E Aerospace closed higher on earnings ahead of HIECO’s earnings release, HIECO subsequently closed higher on its on earnings release and almost every time the stock managed to trade higher following fiscal first quarter results, which it is currently getting ready to report, it was preceded by a move higher in B/E Aerospace.

HEI

HEICO is scheduled to report earnings after the market closes on Wednesday, February 20, 201 with a conference call on Thursday at 9:00 AM ET. The consensus earnings estimate is $0.40 per share and the Word on the Street  number is $0.42 per share.

Kadant

While peers of HEICO are giving a positive signal ahead of its earnings release, perhaps no company has gotten a better signal this week ahead of its earnings release than Kadant (KAI) has from its pear Twin Disc (TWIN). Over the past seven years, shares of Twin Disc have closed higher on its earnings release prior to Kadant’s own earnings release eleven times. The only time Kadant didn’t gap higher on its news was in February of 2006, when the company opened lower by 0.53% but then rallied throughout the day by 4.45%. On average, when Twin Disc has closed higher on its earnings release, Kadant then gapped higher by 5.06% and then averaged an intraday gain of 1.01% (though intraday results were more mixed). On January 22, 2013, Twin Disc beat the consensus earnings estimate of $0.14 per share with earnings of $0.29 per share. This made the stock a Russell Reversal – our only long play for the day. Revenue also came in above expectations and the stock gapped higher on the news by 6.71%, closed higher by an additional 3.42%, gained 7.45% on the second trading day. Two weeks later, it was up another 7.52%.

KAI

Neither Kadant nor Twin Disc have much volume, so it may be worth noting that Kadant has been buying back shares of stock, and that alone should help the bottom line on a per-share basis. The company also only has a handful of analysts following the company but they have been conservative in the past and have given room for an upside surprise. The consensus earnings estimate is $0.41 per share and the Word on the Street   number is $0.45 per share.

We have not confirmed the release date, but it has reported results during this week in the past and we expect the company to report after the close on Wednesday, February 20, 2013.

CDI Corp. (NYSE:CDI) today announced that it has been awarded a contract with Access Midstream Partners (formerly Chesapeake Midstream Development) to develop a comprehensive set of facility specifications that will allow Access to further standardize and optimize the design and construction of natural gas compressor stations in Louisiana, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia and Wyoming.

CDI's engineers will create a comprehensive standardization package to enable Access's project engineering team to minimize the engineering required for each compressor facility, shorten construction time, further ensure consistent project quality and safety, reduce materials costs and improve inventory processes.

"We are delighted that Access Midstream has selected CDI for this project," said Robert Giorgio, President of CDI's Global Engineering and Technology Solutions business. "Standardization of facilities can provide a competitive advantage in the growing natural gas industry and our experienced team of engineers look forward to helping Access design optimal engineering specifications to more efficiently meet its gas distribution targets."

About CDI

CDI Corp. (NYSE:CDI) is an integrated, market-leading engineering and technology services firm providing differentiated, client-focused solutions in select global industries. CDI provides Global Engineering & Technology Solutions and Professional Services Staffing through its global business operations in the Americas, EMEA and APAC. The Company also provides staffing services through its franchised Management Recruiters International, Inc. (MRI) operating unit. Learn more at http://www.cdicorp.com

CDI - Cdi Corporation - Support $15.50 and Resistance $17.50

There is strong support to this market, but the trade continues to crowd. Something is about to give.

• Cisco – what is resistance should become support
• ValueClick – what is resistance should become support
• Goodyear Tire – expected beat
• CenturyLink – a potential short squeeze

There is an old Wall Street saying that it takes buyers to lift stocks but they fall of their own weight, but in today’s market’s, stock prices are most highly correlated with the Federal Reserve’s balance sheet and the Fed’s balance sheet is going to expand like never before in 2013. In other words, there is always a supply of new money going to work in the markets so there merely needs to be an absence of sellers to lift stock prices. That is exactly what we saw on Friday when the S&P 500 pushed to a new high on the lightest volume of the year due to the snow storm in the northeast. The light volume meant fewer sellers and the extra billion dollars added to the market put money to work in the stock market.

Still, just because the Fed’s balance sheet is going to increase in basically a straight line for probably all of 2013, it doesn’t mean stock prices are going higher in a straight line; so the key right now with nearly every one long equities is to identify times where selling may offset the buying power created by the Fed. There is one date that stands out this week – Friday, February 15, 2013. This just happens to be the one day during the month of February that the Fed will not be in the market buying Treasuries. The last time the Fed was not in the market buying Treasuries was on January 30, 2013 and that was one of the few times during the month of January that the stock market sold off.

U.S. markets are closed on Monday, February 18, 2013 and we generally start to see some profit taking around this time near the end of earnings season. It makes sense that the equation could shift towards more sellers than buyers towards the end of the week.

Besides this potential short-term pause from the Fed, we have to be leery of U.S. stocks when everyone is on the same side of the trade. It won’t take much to spark a quick selloff when these investors start to exit their positions. Therefore, we have our list of potential causes of selling against the Fed’s buying and at the top of the list is disappointment out of Japan. The Japanese Yen is the perfect example of how an extreme sentiment doesn’t necessarily halt a move when the fundamentals are behind it. We’ve never seen as many people bearish the Japanese Yen as we’ve seen over the past several weeks, yet the Yen just keeps weakening. The new Prime Minister Abe has promised to end deflation by forcing the Bank of Japan to weaken the Yen and the current governor of the Bank of Japan has decided to leave his position early, which will accelerate the transition to what promises to be a much more dovish central bank. Still, the Policy Board meets this Wednesday and Thursday and is expected to maintain its current policy as economic data in Japan shows signs of bottoming, especially with a leadership change just around the corner. The fundamentals might be changing for the Japanese Yen, but no change this week with everyone seemingly leaning on weakness in the Yen, could force a short-term squeeze in the Yen.

That’s important because the Yen and the Yen crosses are one of the best measures of global market liquidity, so a short squeeze in the Yen should create selling in U.S. stocks. There is also the growing risk of a military conflict between Japan and China over the islands in the East China Sea.

Another item at the top of our list of risks that could spark selling could show up in the Retail Sales numbers this week. Payroll taxes have gone up to start the new year and consumers, especially on the lower-income side, are having to tighten their belts a little. That is already showing up in some of the sales numbers and January Retail Sales are expected to be soft on Wednesday. This comes ahead of the potential spending cuts on March 1, 2013, which could be another hit to retail sales in March. There is already a downside tendency for stocks after earnings season and into early March – seasonality that is greatest during the first year of the Presidential cycle. Overall expectations are generally in-line with consensus estimates, with possible downside to flat estimates after stripping out auto sales and gasoline.

Then there is currency risk outside of the Yen. “Currency wars” is a hot topic right now and an announcement is expected to be made at the upcoming G-20 meeting stating central banks will not target specific exchange rates. Yet, while the Fed is expanding its balance sheet at a record pace, the U.S. Dollar is still strengthening against major risk currencies such as the Canadian Dollar and the Australian Dollar. Expectations are for rates to get cut in Australia and there are growing expectations of a surprise cut in Canada. Consequently, these currencies are selling off and that puts pressure on the Fed’s objective of creating inflation in the U.S. The key, though, is probably the Euro, which did see some selling last week against the U.S. Dollar, but this appears to be merely selling from an overbought condition for now and our model based on the relative growth of the M2 money supply in the Eurozone and the U.S. suggests it isn’t quite time to short the Euro.

Therefore, until we see evidence to the contrary, we are going to assume the Euro is going to recover in the near-term, which eases the currency risks.

That means we are sticking with the trend in stocks on the back of continued Fed liquidity and in the face of an extremely crowded market. It also means though we are keeping a tight leash. For example, last week we saw some very sharp whipsaw action in the stock market, which probably took traders out of their positions prematurely while helping the returns that stuck with their trades.

The S&P 500 started the week with a 1% down day followed by a 1% up day. A couple of days later there was another sharp selloff before another rally to new highs. Friday’s move pushed the index above the 1,515 resistance level that formed during the week and throughout the day stocks bounced around forming a flag for the S&P 500 between 1,515 and 1,518. Our view is that 1,515 will hold as support a move to 1,524 is right around the corner, but the trade is to go in the direction outside of the flag. That means we will become more cautious on a move below 1,515 even though we see the more important level around 1,496.

The problem with this view is when we look farther out, we see two major lines converging. The top red line marking the tops from April and September touch the 1,524 level on Friday, so there is upside room for the move higher out of the flag pattern for the week, but just barely. There is also a line off of the June low that held as support in late October and early November, and then proved to be resistance until the Fed’s total of $85 billion in asset buying in January, combined with some improving earnings data pushed the index through the resistance level, which then held as support last week.

Both of these lines are proving to be important and the cross through one of these lines is inevitable over the next couple of weeks. Our overall bias for 2013 is to the upside considering the $1 trillion balance sheet expansion by the Fed and its correlation with stock prices, but the near-term trade is to go in the direction of a move outside these lines and considering the extremely crowded optimistic view of stocks, it would be very healthy for a quick selloff in stocks. When we put this all together we believe the most likely scenario is for an initial pop to the 1,524 area before a selloff. Either way, we want to be buyers of weakness and will view the selloff as a buying opportunity until something changes. These means we are maintaining our strategy of focusing long around earnings.

We often say that Intel (INTC) sets the tone for stocks during earnings season but Cisco (CSCO) tells us how stocks are generally going to trade after earnings season, which we view as officially ending with Cisco’s report after the market closes on Wednesday, February 13, 2013. The numbers, of course, matter; but the most important information will come from CEO John Chambers during the conference call where he’ll not only tell us the state of his own company, but also how strong or weak nearly every business sector around the world that is connected to the Internet or has a network – including strong growth industries such as cloud computing, mobile computing, and Internet security.

The expectations are for Mr. Chambers to tell us that things are much better than they were this time last year, which is interesting because the stock is basically trading right where it was around this time last year. The stock closed on Friday at $21.30, which happens to be resistance dating back to last spring, but expectations of what Mr. Chambers is going to say could push the stock above $21.30 ahead of earnings after which we expect $21.30 to be the new support going forward. After all, the stock has historically traded at just 16.9 times forward estimates, which suggests upside room to $32 using current estimates.

Those estimates are expected to go higher following the company’s earnings release. Sanjiv Wadhwani at Stifel Nicolaus said Cisco should beat expectations and Kevin Dennean at Citigroup said he believes results will at least be in-line with current expectations and sees a potential upside to fiscal third quarter guidance over current consensus estimates. Simon Leopold at Raymond James said their checks suggest an in-line quarter but with an upside bias. Ittai Kidron at Oppenheimer said their checks suggest Cisco will beat consensus estimates for the quarter. The consensus earnings estimate is $0.48 per share on revenue of $12.06 billion, but the Word on the Street number is $0.50 per share with revenue whispers of around $12.15 billion.

ValueClick

Last week we traded AOL (AOL) and LinkedIn (LNKD) ahead of their earnings release as Word on the Street Plays and we traded OpenTable (OPEN) before its earnings release as a Long Gap Play. The three averaged double-digit percentage gains for us last week. While we didn’t make it a play ahead of earnings (at least not yet), ValueClick (VCLK) is the next in the group to report with similar expectations. The bad news is, perhaps, that much of the potential move in the stock price came on Friday after the others reported results, but the stock still isn’t at a new high even though estimates have been revised significantly higher in recent weeks to new highs. Sameet Sinha at B. Riley said the company is tracking above expectations for the quarter and the Word on the Street  number is $0.54 per share – above the consensus earnings estimate of $0.52 per share. A beat should push the stock $21.85 and, considering the stock has historically traded at 21.8 times forward GAAP estimates but is currently trading at just 13.6 times GAAP estimates, $21.85 should serve as solid support going forward.

ValueClick is scheduled to report earnings after the market closes on Wednesday, February 13, 2013 with a conference call scheduled for 4:30 PM ET.

Goodyear Tire & Rubber

While the Internet stocks grabbed the attention late last week with strong moves higher, the one group that has worked consistently well throughout the quarter has been the automotive related names. In fact, while retail sales are at risk of disappointing this week, among the strengths expected are automotive sales. To paraphrase my dad, it is easy to determine the number of cars being sold: you count the tires and divide by four. Quite simply, when auto sales are strong, it usually means tire sales are strong too. Likewise, AutoNation (AN) was a recent Word on the Street  Play ahead of earnings and it beat estimates and traded higher on the news. In the past when AutoNation has beat estimates and opened higher on the news, Goodyear Tire & Rubber (GT) closed higher on its own earnings release by an average of 2.17%. The results are even better following a move by AutoNation to a new high, and similar results for Goodyear come following positive results and price action for O’Reilly Automotive (ORLY), which provided positive earnings and guidance last week.

Prior to O’Reilly Automotive’s positive guidance though, we made Goodyear an Word on the Street ® Play ahead of its expected earnings before the market opens on Tuesday, February 12, 2013. The consensus earnings estimate is $0.21 per share and the Word on the Street  number is $0.26 per share. A conference call is scheduled for 9:00 AM ET.

CenturyLink

One of the keys to stock market gains is being right when most people are wrong in the market. That is the risk to the overall stock market right now because so many people are bullish stocks and, by some measures, optimism is at record highs. One area where we are not seeing such extreme optimism is short interest. Short interest data actually suggested investors were overly bearish just prior to the current earnings season and, even though it has dropped off some, it still leans on the high side – at least as of January 15, 2013. Similarly, some of the stocks that have traded well after earnings have been those with high short interest. That means companies like CenturyLink (CTL) still have plenty of upside if they can deliver results because short interest in the name is at its highest level of the year and is up 75% from the same time last year. Most of the increase has come since the middle of November when the stock was near a low, which means much of the short sellers have a loss in their positions. Those losses have only gotten bigger and estimates have gone higher to a level above where they were when there were only 20 million shares shorted.

Perhaps the better trade is to buy Windstream (WIN) ahead of its earnings release next week on positive results from CenturyLink, but David Barden at Bank of America-Merrill Lynch said he likes the stock heading into its earnings release because it has solidly beat and raised guidance the last three quarters and has been executing above expectations during the quarter with conservative fourth quarter estimates.

The consensus earnings estimate is $0.68 per share and the Word on the Street number is $0.72 per share and our stats show this stock has a 67% chance of going higher ahead of its earnings release through its open with an average gain of 2.41%, which is why we made it an Word on the Street Play on Friday ahead of its earnings release scheduled for after the market close on Wednesday, February 13, 2013.

Owens and Minor , Inc (OMI)

Owens & Minor, Inc., (NYSE: OMI) a FORTUNE 500 company headquartered in Richmond, Virginia, is a leading national distributor of name-brand medical and surgical supplies and a healthcare supply-chain management company. Owens & Minor also offers global third-party logistics services to pharmaceutical, life-science, and medical-device manufacturers through its European business unit, Movianto, and through its U.S.-based service, OM HealthCare Logistics. With a diverse product and service offering and distribution centers throughout the United States, the company serves hospitals, integrated healthcare systems, alternate site locations, group purchasing organizations, healthcare suppliers, and the federal government. Owens & Minor also provides technology and consulting programs that improve inventory management and streamline logistics across the entire medical supply chain. For news releases, or for more information about Owens & Minor, visit the company website at http://www.owens-minor.com.

Amedisys (AMED)

Gentiva Health Services Inc.'s (GTIV, $9.44, -$0.69, -6.81%) "poor" 0.8% increase in home-health growth last quarter "is surprising for Gentiva, whose recent results have been much more robust than" peer Amedisys (AMED, $11.42, +$0.14, +1.24%), says CRT Capital. While Amedisys is holding up amid Gentiva's stock drop, the broker-dealer thinks Gentiva's miss and demurring for now on 2013 guidance has "significant negative implications for AMED shares" as the company "has the added pressure of the loss of volumes from the renegotiation of a major contract."

Market Summary

Stock market averages opened higher and then moved mostly sideways through the remainder of the session Friday. Economic data helped after a report released early today showed the nation's Trade Balance shrinking 20.7 percent to $38.5 billion in December, led by record exports of petroleum. A separate report on Wholesale Inventories is down .1 percent in December, compared to expectations for an increase of .3 percent. Meanwhile, LinkedIn (LNKD) shares surged 21.3 percent on the heels of its earnings report. Activision Blizzard (ATVI) and AOL were also up on earnings. Moody's (MCO), Nuance (NUAN), and Riverbed Technology (RVBD) saw post-earnings weakness. Elsewhere, action was mixed across Asia, but European equity markets were mostly higher after the losses suffered on the heels of ECB commentary yesterday. The euro is down another .2 percent to 1.3367 on the dollar. Crude oil gave up early gains, falling 3 cents to $95.80, and gold lost $3 to $1668.5. On Wall Street, the Dow was up 40 points midday and finished with a 49-point gain. The NASDAQ added 28.7.