Q2 Challenges and Opportunities

Q2 Challenges and Opportunities
by Sam Collins 04/01/08

Stocks closed modestly higher yesterday, the last day of the month. However, March marked the fifth-consecutive month of losses -- the longest monthly string of losses since 1990. It "was also the worst quarter since the first half of 2002," according to one analyst.

The financial stocks made gains yesterday, following a notice that Citigroup (C) is restructuring its international area into four regional units. The stock closed at $21.42, up 59 cents.

But the pharmaceutical stocks had a rough day over the failure of Merck's (MRK) and Schering-Plough's (SGP) new drug Vytorin, which was expected to be more effective than less costly generics in treating heart disease.

The stock market was also helped by lower crude oil prices and a better-than-expected Chicago Purchasing Managers' Index, which climbed to 48.2 in March versus the 46.3 expected. However, the big story about U.S. Treasury Secretary Hank Paulson's call for the consolidation of U.S. regulators had little impact on the day, since the proposal is not expected to be implemented for many months or even years.

At the close, the Dow Jones Industrial Average (DJI) gained 46 points to end at 12,263. The S&P 500 (SPX) gained seven points at 1,323, and the Nasdaq (NASD) was up 18 points at 2,279.

The New York Stock Exchange traded 1.6 billion shares with breadth at a positive 5-to-3 and on the Nasdaq (NASD), 826 million shares traded with advancers ahead by 4-to- 3.

Crude oil futures (May contract) were off $4.04, at $101.58 a barrel, and the Amex Energy SPDR (XLE) gained 66 cents to close at $74.06. The June gold contract was down $15 at $921.50 per troy ounce. The PHLX Gold/Silver Index (XAU) fell $3.52 to $176.75 as it declines to test its 200-day moving average at $168.

What the Markets Are Saying

Most investors are happy to see the first quarter of 2008 end, since almost every index finished in the loss column. The Dow Industrials (DJI) were down 7.55%, the S&P 500 (SPX) lost 9.92% and the Nasdaq (NASD) was down a whopping 14.07%. But there were several impressive wins in Q1: Gold prices gained 10.3% and crude oil futures were up 5.8%.

I've tried to encourage readers to stay in those sectors that were in uptrends and, by and large, we accomplished that, despite some retracements within the last several weeks. Exchange-Traded Funds (ETFs) like PowerShares Precious Metals (DBP) and PowerShares Agriculture (DBA), as well as the contra-funds like ProShares UltraShort Financials (SKF), Ultra Short S&P 500 (SDS), and Ultra Short Dow 30 (DXD), provided us with some quick profits.

One thing that we learned during the last 90 days was that it was almost always better to take a 20% to 30% profit when we could, rather than holding a position with the expectation that it would go for a double. The volatility of almost every market was very high, which created huge swings -- and for the nimble, it provided wonderful trading opportunities.

As we enter Q2, little has changed: Volatility remains high, the bear market is still with us and opportunities still exist for traders in precious metals, energy and the short side of the market.

For the non-trader, it is best to have a large reserve in money markets and tax-free bonds. Also, our list of ChangeWave performers provides some great values in alternative energy, clean tech, digital lifestyle, smartphones, virtualization and high-yield recession-proofing plays. It is not too early to nibble at them in anticipation of the end of the bear market.

Today's Trading Landscape

The following companies are expected to report earnings: Cheesecake Factory (CAKE), Immucor (BLUD), Layne Christensen (LAYN), OMNOVA Solutions (OMN), and Team Inc. (TISI).

Several economic reports are due today: the March Institute for Supply Management (ISM) Manufacturing results (the consensus expects 47.5, which would mark the third-consecutive monthly contraction below 50), Prices Paid figures (the consensus expects 75.0), Vehicle Sales (the consensus expects 15.2 million) and the February Construction report (the consensus expects a negative 1.0% month-over-month).

The big story today is more losses and write-downs for UBS (UBS) -- this time a whopping $19 billion -- and with it, the chairman goes too. Deutsche Bank (DB) will also write down "leveraged loans and loan commitments, commercial real estate, and residential mortgage-backed securities." Merrill Lynch (MER) estimates its Q1 loss will be $1.38, up from $1.20.

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