This commentary originally appeared at 10:20 a.m. on Real Money Pro – Click here to learn about this dynamic market information service for active traders.
The S&P 500 is enjoying its best start to the year since 1987. Markets are climbing not just a wall of worry but a mountain of misgivings. Even the euro has risen for four consecutive days. It's early in the game, but up to this point, January 2012 feels nothing like the second half of 2011.
The S&P 500 Continuous Contract broke cleanly above resistance on Jan. 10 (arrow) and has been grinding higher ever since. The ability to stay above the Oct. 28 high of 1278 (horizontal line) is the key. As long as we remain above support, we should buy dips, either on the index or on the stronger stocks within. I wouldn't consider exiting a position on the index as long as we're above 1278. The diagnosis here remains the same: We are on our way to 1350.
Individual stocks are always tricky during earnings season, and today we have earnings reports from some of the market's heaviest hitters in the tech sector. Microsoft (MSFT), Google (GOOG) and IBM (IBM) are all reporting today. What are the charts telling us about their relative prospects?
Microsoft jumped out to a great start for 2012 and continues to outperform the indices. What is most interesting to me is that the stock reached its highest point in nearly a year on Tuesday, despite reporting a fourth-quarter shortfall in computer shipments last week. Not only is the stock springing to life, it is shrugging off bad news. I'm already long Microsoft from $27.50, as I said in my Jan. 9 article, "Look Who's Back." If the stock slides after today's earnings, I'd have to consider buying that dip.
On the other hand, I'm neutral on Google, which has underperformed the indices thus far. Google fell on heavy volume last week and has been hugging its 50-day moving average (blue). If Google weren't going into earnings, I'd buy it here, because it has held up so well on its 50-day moving average. But that sharp drop from last week, and the volume behind it, could be foreshadowing some ominous news. Overall, I like the stock, but this one looks too risky to buy into earnings.
Like Google, shares of IBM have also underperformed the indices so far this year. While Google has maintained its position above its 50-day MA, IBM has failed to do so; the tech titan is down 2.8% since the beginning of the year. IBM appears to be forming a bearish head-and-shoulders pattern, with the pattern's neckline at $176, and its 200-day moving average lies just beneath at $175.29 (red). If Big Blue trades beneath those levels, greater losses could be in store.
Regarding the euro, we have already enumerated the reasons why it might go higher this year. Most notable is a huge short position; traders are net short the euro by more than 155,000 contracts, according to the Commodity Futures Trading Commission's latest data. A Greek exit from the euro zone, if it should come to pass, would also be a positive development that could drive euro higher this year.