Making Money Alert: Climbing up Mt. Worry

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The term “climbing a wall of worry” is an oft-abused cliché on Wall Street. But like most clichés, there’s more than a kernel of truth to the concept. The Dow has made a robust surge since last Friday, as has its broad-based brethren, the S&P 500 Index. The Dow is firmly above the psychological and somewhat technically significant 13,000 mark, while the S&P 500 recently just breached the 1,400 level.

The gains we’ve seen in these indices come as the markets face a steep slowdown in global economic growth. That slowdown has been led byChina’s rapidly falling gross domestic product (GDP) growth, as well as the muddling U.S. GDP growth of just 1.5%. When the two largest economies in the world are slowing, there is a real problem for companies hoping to grow earnings. Then, of course, there’sEurope, which continues to be the biggest welt on the battered back of the global economy.

Given the myriad problems with the economic climate around the globe, we can say that stocks are climbingMt.Worry, and not merely a wall of worry.

The chart below of the S&P 500 Index shows just how high domestic stocks have risen since falling to their June low. As you can see, the S&P 500 now trades well above both its short-term, 50-day, and long-term, 200-day moving averages.

The buying in domestic equities also has been reflected in the once extremely beaten-up European equity markets. The chart here of the iShares Europe 350 (IEV) shows just how far the broad measure of large-cap European stocks has come since falling to its June low.

Even stocks in China, as measured by the iShares FTSE China 25 Index (FXI), have managed to push higher. In fact, FXI now is on the verge of breaking above its 200-day moving average.

The recovery in both domestic and international stocks confirms my Mt. Worry thesis. Unfortunately, the bigger worry for the bulls is the very real possibility that the reality of the underlying economic facts finally will begin to sink into traders’ heads. That situation likely would cause a pullback of the sort we’ve seen in May, and that’s why I want you to be very careful of going forward. In fact, I’m preparing for what I consider to be an imminent pullback, and that means protecting gains and taking profits if you have them.

A Three “E”s Update

A few weeks ago, I told you that I was watching what I call the Three “E”s — Earnings, Europe and Emerging Markets. And now that earnings season is winding down, I thought I’d give you a few stats that tell the tale of what I consider a dismal Q2 performance.

According to Bank of America’s (BofA) equity research arm, with nearly 90% of companies in the S&P 500 Index already reporting, just 51% of them beat bottom-line, earnings per share (EPS) estimates. That’s not very muscular, but what’s even less strapping is the number of companies that missed on the top-line revenue front. Here BofA reports that 60% of all S&P 500 companies missed revenue forecasts.

What’s even more worrisome is that analysts at the bank attribute the lack of robust revenue to the strong U.S. dollar vs. the euro, weak commodity prices and slowing global growth. And while BofA points out that some of these headwinds likely will fade, more pressure on growth from a lackluster European economy, as well as inaction in the face of the so-called “fiscal cliff” facing the United States at the end of the year, is likely to keep sales in the S&P 500 muted.

Finally, Bank of America estimates that for the first time since 2008, year-over-year quarterly revenue growth won’t be growth at all. Actually, when all of the numbers are in, the result will be a quarterly revenue decline of 1% from the same quarter a year ago.

Based on this data, it certainly seems as though the first “E” on my watch list has been a big disappointment, and once traders realize this reality, “watch out below.”

The Requirement of Tyrants

“One does not have to be in favor of death camps or wars of conquest to be a tyrant. The only requirement is that one has to believe in the primacy of the state over individual rights.”

–Walter E. Williams, professor of economics, George Mason University

The always provocative Walter Williams is full of wisdom and insight on myriad matters, and here he cautions us against the potential consequences of allowing the state to take precedent over the individual. That, he so eloquently points out, is the only requirement of tyrants.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To the best within us,

Doug Fabian

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, going to DougFabian.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027879.