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Lucky Seven: Dow Hits 7th Straight Win

The risks are rising with every new turn of the wheel, but investors refuse to leave the game. Stocks jumped higher today, with the Dow Jones Industrial Average notching its seventh consecutive winning session. The S&P 500 also closed in the green but falling tech stocks pulled down the Nasdaq.

For the Dow, today was “lucky seven.” But if you turn on the television, you see a world bedeviled by bad luck.

Israeli missile strikes yesterday against Syria, tensions over Iran, a brewing trade war with China, trouble-making from Russia, instability on the Korean peninsula, disarray in the White House, bitter partisan warfare in Congress… the dire headlines keep coming. Rising inflation and Federal Reserve tightening add to the uncertainty.

Amid a turbulent 2018, investors have repeatedly climbed a wall of worry, pushing stocks higher as each nerve-wracking fear is overcome.

However, if you closely examine the underlying concept of a wall of worry, it tells you that the bull market lacks confidence. Investors are caught in a constant state of anxiety, fretting about how long the good times can keep rolling.

As the market continues to shrug off risks and edge higher, the decision becomes agonizing: pocket profits now or, as the song goes, let the spinning wheel ride? But that’s the mentality of a gambler in a casino. Which is to say, the mentality of an ultimate loser. Keep in mind, both the Dow and S&P 500 remain in negative territory for the year.

Stick to your long-term investment goals, avoid impulsive selling, and calibrate your portfolio allocations for “defensive growth.” The pie chart below makes general sense now.

The great disconnect…

We’re witnessing a superb earnings season, which has gone a long way to offset mounting risks.

As of today, with about 81% of S&P 500 companies reporting actual results for the first quarter, 78% of them have reported a positive earnings per share (EPS) surprise and 77% have reported a positive revenue surprise, according to the research firm FactSet. If 78% turns out to be the final number for the quarter, it will mark the highest percentage for that metric since the third quarter of 2008.

For the first quarter of 2018, the blended year-over-year earnings growth rate for the S&P 500 is 24.2%. If that percentage turns out to be the actual growth rate for the quarter, it will mark the highest earnings growth since the third quarter of 2010, when it reached 34%.

But every silver lining comes with a cloud. This quarter, good earnings aren’t always good enough. Wall Street has been rewarding upside earnings surprises less than average and punishing downside earnings surprises more than average.

The risks I’ve cited above continue to weigh on investors. Stocks bounced around today, marking another volatile session.

The disconnect between expectations and performance have been at times stunning. In many occurrences, even after a company has posted a blockbuster earnings report, its share price has actually plunged because analysts found something to dislike in the operating results.

Case in point: Graphics processor maker NVIDIA (NSDQ: NVDA) reported stellar earnings after hours on Thursday. Yet sure enough, NVDA shares tumbled today by 2.15%, helping drag down the tech-heavy Nasdaq.

After Thursday’s closing bell, NVIDIA reported EPS of $1.98 compared to consensus estimates of $1.46. Revenue came in at $3.21 billion, versus estimates of $2.89 billion. As a reward for beating on both the top and bottom lines, NVIDIA saw its stock fall.

Reminds me of another song lyric: ain’t no pleasin’ you. Analysts determined that the chip maker has too many cryptocurrency clients and insufficient cloud computing orders. Cryptocurrency is rightfully deemed as risky, whereas the cloud is the place to be. But once again, the investment herd is being short sighted.

NVIDIA is the top maker of chips that allow a computer to present graphics. This much is well known. But here’s an underappreciated NVDA strength: “blockchains” that use the company’s chips.

Blockchains are digital ways to exchange money; they form the infrastructure of cryptocurrencies. But blockchains have other uses. They let businesses store encrypted data in a ledger. This gives NVIDIA prospects in commerce. This strength was lost on investors today.

The bears have been decidedly wrong about many other stocks this year. Take Apple (NSDQ: AAPL).

I recently heard a nitwit on CNBC argue that Apple is a “has been” because of slowing iPhone sales and supposedly unsustainable demand for the company’s gadgets in China. Apple last week surprised the naysayers with a blowout report that crushed earnings expectations. The stock has since soared to new highs. Want to lose money? Get your advice from cable TV.

The Dow and S&P 500 closed higher today, but don’t kid yourself. The bulls are wavering. When Wall Street runs out of walls to climb, investors may run out of luck.

Friday Market Wrap

  • DJIA: +0.37% or +91.64 points to close at 24,831.17
  • S&P 500: +0.17% or +4.65 points to close at 2,727.72
  • Nasdaq: -0.03% or -2.09 points to close at 7,402.88

Friday’s Big Gainers

  • Trade Desk (NSDQ: TTD) +43.39%

Tech ad platform beats on earnings.

  • WideOpenWest (NYSE: WOW) +28.89%

Cable operator’s earnings excel.

  • ArcBest (NSDQ: ARCB) +28.01%

Logistics provider posts strong operating results.

Friday’s Big Decliners

  • Intrexon (NSDQ: XON) -19.77%

Biotech misses on revenue.

  • Yelp (NSDQ: YELP) -7.83%

Business review site disappoints on earnings.

  • Thomson Reuters (NSDQ: TRI) -3.96%

Publisher posts strong earnings but analysts skeptical.

Letters to the Editor

“What’s your view on commodities right now?” — Donna F.

After a prolonged recession in the commodities sector that generated seemingly endless red ink for the major players, the combination of corporate cost cutting and rising commodity prices has buoyed the operating results and share prices of the industry’s giant bellwethers.

The prices of raw materials typically rise when inflation is accelerating, which makes commodities-based investments proven inflation hedges.

Questions about inflation protection? Reach me via email:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

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