The S&P 500’s Next Stumbling Block and The Fed’s Foul Play

There’s no question that 2010 is already proving to be a tough year for stocks. Until this week almost all broad-based stock indexes were down close to 5% on the year, and economic fundamentals don’t seem to be improving much either. That said, not all stocks are having as rough a time of it…

We’ve added two new positions to the Rhino Stock Report’s model portfolio in 2010 – both are currently up on the year with an average of 8.6% gains. But the S&P’s next stumbling block could keep us from adding a third position until March. Here’s why:

A colossal breakdown in the S&P 500 in mid-January caused the index to fall below the 50-day moving average, a key technical support level. And although the market has staged a serious comeback in the last couple of weeks, that 50-day moving average could prove to be too tough of a resistance level right now.

With emphasis on economic numbers – like interest rates and jobs – this week, the fundamentals are driving the market. Since our economic fundamentals have been anything but bullish this year, the chances of seeing a break above the thin blue line are diminished.

That’s not to say that the S&P won’t move above the 1109 level next week – only that it’s going to take more bullish power than we’ve currently got on tap. For us, that means that we’re not going to make any new moves until we see a bounce off the 50-day or a breakout above it. (To learn why that’s significant, watch Planning Your Entries and Exits With Technical Analysis)

The Fed Fouls the Markets

Stocks are trading lower today thanks to the Federal Reserve’s decision to increase a peripheral interest rate after yesterday’s market close. To be clear, the rate (which dictates how much interest banks must pay out in emergency loans) doesn’t have much of an effect on monetary policy – but the change still has investors shaken.

That’s because a rate increase of any sort was so unexpected. The Fed slashed interest rates following 2008’s financial meltdown in order to lower the cost of capital and add liquidity to the seized-up credit market. An increase suggests that economic fundamentals are improved enough to increase the cost of borrowing – something that investors don’t see right now.

Although it’s unlikely the Fed will hike more significant rates, expect investors to continue to be anxious until the next bout of economic numbers comes out and they forget about rates once again…

Our Big Earnings Week

Next week is a significant week for a few of the companies in our Rhino Stock Report model portfolio. Three companies – NRG Energy (NYSE:NRG), J.M. Smucker (NYSE:SJM), and SPX Corporation (NYSE:SPW) – will announce their quarterly numbers to the public. I’m optimistic about all three stocks, so don’t expect a significant change-up in our portfolio positions next week. I’ll fill you in on the results in next week’s Market Recap…

Webinar: Planning Your Entries and Exits Using Technical Analysis

It’s been a long time coming, but the Rhino Stock Report’s first exclusive webinar is finally available for Rhino Stock Report members. To watch the video, just click play below…

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The Market’s Malaise, BDX Announces Earnings, and Toyota’s Trouble

What a week for stocks. Last Friday morning, I wrote to you about why I believed that the market wouldn’t break down — but to watch out if the S&P 500 slid below 1114. Sure enough, the S&P traded right around that 1114 support level for most of the day… until a slide under the 1114 level prompted a huge sell-off down to the next-lower support level. Ouch. If you missed it, I wrote an update on Saturday on the Rhino Stock Report blog, addressing the implications of the market meltdown (click here to read it).

This week, the market has been pretty obedient to the support levels I drew in Saturday’s blog post (with the exception of a little scare during yesterday’s early trading), so I’m sticking by that analysis for now. All of the broad market indexes have been overbought for a while now — no surprise given the fact that we’ve seen an almost unrestrained rally from the lows of March 2009 until now — and a correction has long been overdue.

I think we’ll see some price stabilization next week as earning season stretches on and more economic data comes out. We want fundamentals controlling prices in this market, after all.

Becton, Dickinson Impresses With Earnings

While we only just added Becton, Dickinson (NYSE:BDX) to our Rhino Stock portfolio this month, the company just announced earning yesterday. So let’s talk about them again for a minute…

Becton announced first quarter earnings of $1.30 per share, topping analyst estimates by 7%. Revenue and guidance were also strong: sales rose 11% to $1.92 billion versus the quarter one year ago, and the company increased its guidance for 2010. Becton remains a great company for all of the reasons we talked about when we added it to our portfolio.

The Economy Grows and Toyota’s In Trouble

Today’s GDP report showed that the U.S. economy grew 5.7% in the fourth quarter of 2009 – the fastest pace in six years. And while that’s great news from an economic standpoint, it really hasn’t translated into higher stock prices today. That’s likely largely because investors are still reeling from two weeks of tough market conditions.

Meanwhile, the biggest news on the street seems to be the recall that’s going on with Toyota Motors (NYSE:TM). The company, which took GM’s spot as the world’s biggest automaker in 2007, has halted sales and production of some of its most popular models, citing a defect that causes accelerator pedals to get stuck. Shares of the company are down more than 12% this week on the news.

Waiting for the Webinar…

After a lot of waiting, our first members-only investing webinar will be available to you next week. The video, which teaches you how to pick the best entry and exit points for your stocks based on technical analysis, will be sent to your inbox as soon as it’s live on theRhino Stock Report website. Keep an eye out for it.

An Inside Look at Earnings Season

We’re smack-dab in the middle of earnings season right now (in fact, one of our portfolio plays announces its earnings today), so what better time to explore the inner workings of the time when a slew of companies report their numbers?

Earnings season is especially significant during times of economic uncertainty, because the fundamental numbers that firms release can be one of the few economic indicators that investors have to go on — Poor bank earnings caused much of the sell-off we saw last week, so it’s clear that even companies outside of our portfolio can have a dramatic impact on our positions.

But have you ever wondered how the earnings process works? Here’s a look that draws on my days as an auditor at a “Big 4″ public accounting firm: http://www.thestreet.com/story/10440258/1/earnings-confidential-marriott-xyratex.html

The Importance of Asset Allocation

I got this question the other day from a reader who was interested in the special situation forming with shares of Bershire Hathaway (NYSE:BRK.B):

Excellent Artitcle. I am seriously considering your advice to purchase a share before the split takes place. It would replace all of my current holdings in my Roth IRA stock trading account.

Normally, an investor trying to replace an entire portfolio with one stock is the biggest red flag imaginable. After all, diversification is the name of the game when it comes to retirement accounts like IRAs and 401(k)s. But what about a conglomerate like Berkshire… Do the same rules apply?

Ultimately, while Berkshire Hathaway is a great stock with a well-diversified portfolio of subsidiaries, I’d strongly urge investors not to liquidate all of their other holdings to buy shares of the company. That’s because while Berkshire does have some good diversification, Buffett’s self-avowed strategy is to avoid stocks he doesn’t understand. That’s translated into an underrepresentation of tech names, incidentally one of the sectors that led us out of 2008’s mess the fastest.

Now that Berkshire’s B shares have split, you can pick up a position without wiping out your exposure to areas that the company doesn’t play with.

For a more in-depth explanation of diversification and asset allocation, check out this article I wrote back in 2007 for TheStreet.com.