Monday, October 22, 2007

Will Buying The Dip Work Again?

S&P 500 Index

The next area of support looks to be the 1476.76 area. This will coincide with the area around the 200 day moving average. A group discussed earlier could hold some clues to if buying the dips is a method that is going to work again this time. The is group is a basket of multinational stocks that are benefiting from the lower dollar along with the strong global economic growth. Below is a chart comparing the performance of this basket and the S&P 500 Index going back to 2003. The multinationals have outperformed the overall market by almost 2:1 since the 2003 low.

S&P 500 Index vs Basket of Multinational Companies

Some of the comments made by Caterpillar during their earnings release Friday have shed some light on the potential problems with earnings growth. If sales in the United States slow too much and foreign sales can not make up for this slowing, more and more companies will use this as an excuse when they miss earnings or want to lower expectations. Below is a chart of Caterpillar which shows that it is at an important juncture, testing its 200day moving average for the third time. Is the third time the charm?

CAT - Caterpillar

The next chart compares this basket of multinational stocks with the U.S. Dollar index. It shows the steady decline of the dollar and the strong move of stocks benefiting from this event. It is important to watch the data of foreign investment in the United States. As the dollar goes lower, at some point it is going to lead to less investment or net selling of U.S. assets.

Dollar vs. Multinational U.S. Companies

This weakness will eventually carry over to technology stocks. They were the last group to get attention from the 2003 low. This does not mean that all stocks should be sold, it does however mean that there will be headwinds and any doubt or questionable comment during earnings could lead to strong selling.

NDX - NASDAQ 100 Index

With a 1000+ companies reporting earnings this week, one thing is certain - it won't be boring. Future posts this week will include spreadsheets with moneyflow changes in various sectors. This could help set up some ideas for what groups could gain some attention IF there is a rally closer to the end of the year. Currently though, the focus should be on preservation of capital and proceeding with caution.

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