In 2011, the recession trade was on.  Utilities and consumer staples led the way.  In 2012, the risk trade has been back on and the 2011 winners have lagged.  One of the leaders in the last few months as the market has rebounded has been the Dow Jones Transportation Average (DJTA).  You can see from the chart below that the transports have been outperforming the general market (measured by the S&P 500) since October.  That leads many investors to believe the economy is in better shape than originally thought.  As we know, the stock market is a leading indicator and with the transports leading the way up, some believe things might look even better in the next few months.

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Friday morning, the stock market was down over 1% based on all the major indices.  If the stock market were to close 1% lower today, this would be the first time since December.  A correction is long overdue but how do you know when it’s actually coming?  There are several oscillators that help us determine whether or not a market is overbought or not.  Traders also look for negative divergences or relationships that are falling apart to determine when it’s time for a pause.  In other words, a change in character.  This is what we’ve seen in the last few days.  Look at the chart again and you’ll see a change in character in the relationship between transports and the overall stock market.  Transports have begun to lag in the last couple of weeks.  This doesn’t necessarily mean transports have been going straight down or plummeting.  The chart above is simply a relative strength chart between transports and the S&P 500.  So, it’s simply telling us which one is either going down faster than the other or which one is going up faster than the other.

The change in character occured when it broke the uptrend line a few days ago.  This picture above was just one clue that a down day was coming.  Remember that there are many investors that are looking to buy the dip.  Therefore, any correction may be short-lived.  There’s no guaranty that the stock market will be be down today.  But, there’s a noticeable crack in the rally.  Caution is warranted in the short-term.

Initial jobless claims were reported this morning for the week ending February 4th.  The number was 358,000 versus an estimate of 370,000.  The prior week’s report was revised up by 6,000.  Another economic that beat the estimates.  Hence, the market continues to move higher.

Below is a chart of the initial jobless claims (10-week moving average) inverted compared to the S&P 500.  I’ve shown this chart many times before to illustrate the tight correlation.  This is simply an update.

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As you know from my recent blog posts and podcasts, I’m very reluctant to believe many of the numbers that are being reported.  For example, the market celebrated the non-farm payrolls report last Friday that was much better than expected.  The estimate was a 140,000 increase.  However, the actual number reported was 243,000.  What many failed to realize was that 1,200,000 people dropped out of the labor force last month alone!  The labor force participation rate is now at a 30-year low.  This is yet another example of the many economic reports that appear great when announced.  The nightly news reports them and the Saturday & Sunday papers have their headline.  However, a little digging typically reveals there’s more to the story than the headline number.

Today’s initial jobless claims report was once again better than general estimates and those claims continue to fall.  Therefore, the market continues to rise.  There have been numerous reports in recent weeks that have beat estimates.  That’s the key.  As long as these reports are better than expected, I expect the market to keep rising.

One of the keys to making money in the stock market is understanding what’s being reported and the perception of that news.  Many educated investors realize while Armageddon isn’t around the corner as was perceived last summer, there are still some serious problems globally.  But, the perception is that things are much better now than a few months ago.  Therefore, the market is pricing in a better environment.

For me, I’m still cautious but participating.  My mantra lately has been “proceed with caution, but proceed”.  Short-term, the market is very overbought and yet refuses to go down.  If you are more bullish now, I believe you might get a better chance to buy equities in the next several days at lower prices.

I’ve received more e-mails and phone calls regarding the Facebook IPO since any I can remember in the post tech bubble era.  To those debating whether or not they want to buy Facebook the day it goes public, I say hold the phone.  With any IPO, there’s so much uncertainty and unless you receive an allocation of the shares prior to the IPO, you may miss a lot of the upside.  Facebook may end up being a great investment, but in the short-term, it will be a crapshoot.  IPOs take several weeks to settle in after hitting the market.  Also, most of the social media IPOs are trading below their opening day price.  While the frenzy surrounding Facebook continues, I see a stock with a long term history right underneath our noses that can be bought right now and it’s extremely cheap. 

Today, Apple (AAPL) reached another new all-time high ($464.98).  With that comes the debate on whether it should be bought or sold at these lofty levels.  Whenever a stock reaches a new high, there are those that say it’s time to take profits.  Then, there are those that say it’s there for a reason.  In the case of Apple, I say it’s the latter.  What this company has managed to do is simply amazing.  It started with the Ipod and the transformation of the music industry.  There were already MP3 players.  But, none were as easy to use and as beautiful as Apple’s version.  Then, those that owned Ipods had to buy a Macintosh simply because it worked so well with syncing music to the Ipod.  Logically, the next step was integrating the iPod into a phone.  Hence, the iPhone.  How neat it would be to have all the bells and whistles of an iPhone with a larger screen.  The iPad is introduced.  Over the years, there have been newer versions of these unbelievable products.  The doubters have continued to pile on, perhaps out of jealously or perhaps it’s because Apple is viewed as a cocky company.  You’ll get no debate from me.  It’s their way or the highway essentially.  In March, we’ll more than likely get a new version of the iPad.  In addition, there are plenty of rumors that an Apple TV is in the works. (not the little device that hooks up to your existing television, but an actual television set)  The pipeline is full and the company is still hitting on all cylinders.

In many cases, the company may be doing fine, but the stock is another story.  Valuations of many companies get so rich as the company’s success builds, the stock is too expensive to buy.  This is not the case with Apple.  Just take a look at the P/E (price to earnings) ratio compared to the stock price.

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It’s amazing that on a valuation basis, Apple is cheaper now than it was in 2009, even though the stock has tripled.  Typically, the reason a P/E ratio falls is because the growth is slowing or margins are falling.  This is not the case with Apple.  Below, you’ll see a picture of their operating margins which are still rising.

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Here’s a few of Apple’s key stats in regards to their fundamentals:

1. P/E:  13.2
2. Market Cap:  $432.6 Billion
3. Free Cash Flow per Share:  $36.00
4. Price to Free Cash Flow:  8.4
5. Debt:  None
6. Return on Equity:  41.7%
7. Cash & Equivalents as of December 31, 2011:  $97.6 Billion
8. Revenue Growth % YOY as of December 31, 2011:  73.27%
9. Adjusted Earnings per Share Growth % YOY as of December 31, 2011:  115.71%

The nice thing about the stock market is the fact that occasionally there is a sale and stocks will deviate from their true value.  Apple occasionally goes on sale and during those sales, investors get an opportunity to purchase a great company.  I’m not suggesting running out and buying Apple today.  It’s due for a pullback.  I’m simply making the case that despite its hefty price of $464, investors must realize what they get with that price.  Even in February 2012, it’s still cheap.

At some point in the next several years, maybe Apple won’t be the company they are today.  Apple has emerged so quickly as a dominant company that it really took the tech world by surprise.  Now, there are many tablets from which to choose.  Nobody competes today, but they will in the future.  It’s imperative Apple continues to innovate.  Currently, the competitors seem a few steps behind. 

Apple’s a growth story and a value story all wrapped up in one stock.  It’s a stock even Warren Buffett would love. 

At the time of this publication, some clients of Mr. Eggerss owned Apple, Inc. (AAPL).

It’s amazing how worked up everyone gets on the eve and morning of the non-farm payrolls report.  This morning, the number was reported as 200,000 jobs created in December versus an expectation of 155,000.  The prior month’s report of 120,000 was revised down to 100,000.  Immediately, the equity futures jumped on the news and slowly began to give back those temporary gains.  Within an hour of trading, the Dow Jones was down over 70 points.  Below is a picture of the non-farm payrolls number over the last several months.

There is speculation that the reason the stock market didn’t react more favorably to the jobs report was because a better jobs picture potentially takes QE3 off the table.  In a normal market (which we haven’t had for some time), when there is good economic data, the stock market typically sells off.  This is because it potentially removes the Federal Reserve as a stimulant to stocks.  If the economy is healthy, there is no need for the Fed to be accommodative (low interest rates).  Higher rates are generally bad for stocks.  Higher rates mean consumers have to pay more to borrow money and don’t have more in their pocket to spend.  Hence, companies’ profits decline.  In addition, many investors buy stocks on margin and if rates are higher to borrow money, there won’t be as much demand for stocks.  Therefore, when rates are rising, equities struggle. 

Starting in 2008, that all changed.  Because the news and financial situation was so bad, any good news that was reported helped equity prices to rise.  The Fed started its quantitative easing (versions 1 & 2) and good economic news was actually good news for the stock market.  Perhaps today the market is telling us that good economic news will actually be bad for the stock market.  What happens if the punch bowl is taken away?  What happens if the Fed isn’t there injecting capital and supporting this economy?  What happens if there is no QE3 (quantitative easing version 3)?  Let the pity party begin.  As you know from my podcasts, I don’t believe the economy is as good as some of the backwards looking numbers would lead you to believe.  There are several reasons for this.  First, there is a lot of seasonal hiring which is temporary.  Secondly, many have simply left the workforce and aren’t counted in the numbers.  Thirdly, many of the reports being analyzed are looking in the rear view mirror.  I hope for our country’s sake that the economy does improve.  However, by looking at several forward looking indicators, I don’t see the improvement currently.

We can speculate all day long about why markets go up and down on an hourly basis.  However, the secret is to realize it goes up because more people are buying and it goes down because more people are selling.  It’s that simple.  First of all, overbought and oversold markets trump the news items.  The media will rack their brains trying to figure out why the market is going down when the jobs number was supposedly good.  For the last several days, the stock market has been overbought, simply meaning it needed to take a rest or temporarily stop rising.  This doesn’t necessarily help us with the direction over the next few months.  However, it does tell us that if we want to buy a lot of stocks at a low risk time, we’ll get a better chance to do that at a later point.  That’s what overbought means. For the time being, the investments I remain long in are those that are working.  But, I’m afraid they will end up being rentals, not long-term investments.