Dow reaches another record high

Today Dow managed to reach another all time high. However, the market may face near term correction as we head into the heart of the earning season. In my opinion, several economic indicators which include GDP number, housing starts, manufacturing index as well as employment number point to the economy that is transitioning to slower growth. Past 17 interest rate hikes are finally taking a toll on the pace of the economic growth.

The market so far has seen the glass as half full and continues to expect that the economy is achieving soft landing. We are now heading into the earning season. As the economy is slowing down, the likelihood of corporate earning not meeting the lofty expectation is higher than ever. Earning warning from any of the bell-weather companies in the industrial, retailer, tech and other economically sensitive sector could worry the investors that the economy is in the state of less than perfect landing. This can trigger short term corrective selling in my opinion. In addition, the market has anticipated the Fed easing rate as early as the end of this year. As I have noted, this may not be the case. Although Fed is done hiking the rate, I continue to believe that Fed will leave the rate unchanged until energy and commodity prices are under control. This will leave the economy slowing even further. As a result, I continue to see further erosion in the commodity and oil prices in the intermediate term. The market is now somewhat getting this message. Today the 10 year bond yield is rising as the market realized Fed may not ease the rates so soon. This has resulted in steepening of the yield curve somewhat.

The mortgage rates dropped in recent weeks. However, as the long term rate climb back up again, the mortgage rate may shoot up again. I see further slowing down in the home sales and prices of the home will continue to decline throughout the remaining of the year.

After the market today, Alcoa (AA), biggest Aluminum producer, missed the earning by whopping 11 cents. The metal commodity stocks have been all over the map and my short trade results have been mixed depending on individual names. However, I believe that the slowing economy will temporarily cut earning outlook for these names and I will remain short on these names for now. Genentech also reported earning after the market. The biotech company handily beat the consensus EPS number by 8 cents. However, the stock is selling off because it fell a little short on the revenue number of Herceptin and Rituxan. This may be the sign that the market may be getting a little tired of being a bull. Legg Mason, financial brokerage house, also warns after the market close today. Tomorrow, we may have some selling pressure due to these events. I am interested in seeing how the market manages this bad news. But I do expect we may run into some selling pressure next a few days.

I continue to believe in the financials and biotechs for current state of the market. With financials, everyone knows they are in a difficult environment (inverted yield, mortgage load default, personal bankruptcy law change, slowing home loans, ect). Earning expectation is relative low. So, bad earning result may not result in a sharp sell-off. On the other hand, slowing economy ultimately means rate cut down the road and this could support the financial sectors (JPM and GS are filthy Rich’s pick). I also like biotech. As DNA number shows, biotech may be one of a few sectors that show continued robust earning growth. Biotech sector is still in the midst of strong secular growth trend. Amid the concerns of slowing economy, this sector may provide some safe haven for investors for strong earning results. Biotech sectors are very difficult to analyze and has tons of risks with individual names. Filthy Rich’s approach has been focusing on large cap names with proven earning track record and robust pipeline (AMGN, CELG, and GENZ) and adding one or two small cap names to bring out some specie (PDLI).