TG Strikes Again while the Iron is Hot

I am relatively new to the TG's blogsite. But at the tail end of last week, you got to watch her do some beautiful market timing. Was it based on intuition, gut feeling, experience, market knowledge, all of the above. I don't know her well enough to have even the faintest clue. But Who cares, she did a great job.

To summarize, The SP 500 got dragged down on the first two trading days of November. On the morning of Thurs Nov 1, the Goddess said she was waiting patiently when C and BOA were downgraded. On Friday morning Nov 2, analysts forecasted an earnings recession for the financial sector in Q4 2007 saying profits may decline 20% for the sector as a whole.

By mid-morning Friday, in less than two days, analysts had estimated and quantified the earnings risks that the financial sector poses to the stock market as a whole for the 4th quarter earnings season - when it arrives in January 2008.

The whole ordeal took less than 2 days to finish forming a bullish inverted head and shoulders pattern in the process. By 10.30 am Friday moring, the SP500 had bottomed and formed the head to the bullish inverted head and shoulder pattern. That same morning TG was in the market selectively buying her favorite stocks. Two hours later, TG was done shopping. Very efficiently done, I might add. Three hours later at 1.45 Friday afternoon, the right shoulder to the Inverted head and shoulder pattern had formed.

What happened on the first two trading days of November can also be correlated to what happened during the Q3 earnings season between Oct 19-Oct 25. Financial sector stocks in late October were reporting an earnings recesssion for Q3 07 - stating profit declines averaging 17%. The stock market formed a 5 day bullish inverted head and shoulder pattern while discounting that earnings recession. The big blow to the stock market occurred when Merrill announced its - $8.4 billion loss on Wednesday Oct 24. By 10.15 am that Wednesday morning, the stock maket bottomed and the Head to the pattern had formed and two hours later a short covering rally was underway.

Bottom line is that the impact of the financial sector for Q4 07 for the time being appears to be more or less if not fully discounted.On balance, investors need not worry about earnings season risks again to the stock market until January 08 when Q4 07 earnings season arrives. Of course, there will be other risks encountered along the way, but a significant portion of the financial storms has passed. That leaves the path of least resistance for the rest of the market (ROM) to be selectively bullish. Intuitively, if we have been paying attention at all these past several months, we should be able to sense the market breadth is narrowing considerably.

Anyways, in closing, the pictorial graph above illustrates the SP500 discounting and decomposing the earnings recession risks for Q3 and Q4 07 that the financial sector has imposed on the SP 500 over the past two weeks.