EARNINGS SPARK A RALLY

NEWS: The major indices closed higher, to make it two straight days of big gains. The Dow finished up 207 points or 1.9%, putting together the best two-day bounce since last November. The S&P 500 add 15 points or 1.2% and the NASDAQ also jumped 1.2% or 27 points. The small-cap stocks were right in-line, with a gain of 1.4% for the Russell 2000.

THE BOTTOMLINE: With about 11% of the S&P 500 companies already in the books for second quarter earnings, about 72% have beaten estimates. Looking back on history, this is a very strong number and could be the catalyst needed to help the market put together a sustainable rally. Over the last two months, the estimates for second quarter earnings have come down drastically along with the price of stocks. Therefore, if companies beat the lowered estimates, the probability of a bounce is likely.

I want to highlight a few stocks that reported earnings with some of my thoughts.

JPMorgan Chase (JPM) - Reported earnings of $0.54/share, well above estimates and gained 13% on the day. Over the last two days the stock has risen 31% as investors reevaluate the financial sector. Are things as gloomy as many of the bears want you to believe? If this is market is a bad as the great depression, would JPM make 54 cents in one quarter? I think not.

Crown Holdings (CCK) - A company most have never heard of, but it is a great proxy for the economy. CCK is one of the top global producers of consumer packaging. Today the stock reported great earnings and closed at the best level since 1999. If the economy was in a depression would a company that makes packaging be hitting new multi-year highs? I think not.

Sherman-Williams (SHW) - Stock jumped 12% today after reporting earnings of $1.45/share for the quarter. Considering the paint company has dealt with rising material costs and a housing recession, the numbers are not bad. Granted they are 15% lower than last year at this time, but again, if we are in a depression, would SHW be making $1.45/quarter? I think not.

THE QUIET BREAKOUT

NEWS: The financials have stolen the spotlight this week, but one of the biggest stories is the continued success of the Biotech sector. The Dow Jones US Biotech Index is up 3% this week and closed today at the best level since 2000 and is not far from an all-time high.

THE BOTTOMLINE: I have a love/hate relationship with the biotech sector because this is the third year I have tried to play the sector and each time I have encountered false breakouts. I will go on record again that this is the year the biotechs finally put together a sustainable rally after breaking out to new highs. The combination of strong fundamentals (drugs in pipeline), technicals (breakout), “safe” sector view, and increasing growth give investors reason to put new money into the sector.

I do own shares of a Biotech ETF for a number of my Portfolio Management Clients as well as the Moderate Portfolio of The ETF Bulletin. When it comes to the biotech sector, over 90% of the time I will lean towards an ETF versus an individual stock. This strategy is based on several studies PFG performed that calculate the reward vs. risk of the biotech stocks versus ETFs.

THE DAILY ETF UPDATE - THE END OF THE OIL TRADE?

NEWS: Oil took another big hit today when it fell $5.14 to close the day at $129.46/barrel. This is a $15 drop in the last week and the commodity closed below the 50-day moving average for the first time this year.

THE BOTTOMLINE: If you believe oil will continue to fall and possibly test the $100 in the near future, there are a number of ETFs available. An ETF that we owned in our Aggressive Portfolio of The ETF Bulletin and sold today is the PowerShares DB Crude Oil Double Short ETN (NYSE: DTO). The ETN moves inverse to the price of oil with a 2-to-1 leverage. In theory a drop in oil of 2% will result in a 4% for DTO. In the last 4 days the ETN is up 23%.

There is also the ProShares UltraShort Oil & Gas ETF (AMEX: DUG), which also gives 2-to-1 inverse leverage, but to a basket of energy stocks instead of the oil futures contract. In two weeks the ETF is up over 30%. We did own this in the ETF Bulletin, but sold a few days too early.