I suspect that was the case over the last month or so with aerospace and defense stocks. Prior to unveiling the requested military budget for 2011 (2010’s has been in place since last October), many investors were convinced that progressive Democrat President Barack Obama would slash military spending. Surprise - he wants to spend more in 2011 than he did in 2010, after 2010’s total ended up being bigger than 2009’s number [2009's total was George W. Bush's call.]

Good news for defense contractors? You bet. In fact, I’d almost say the expanded budget alone makes them investment-worthy….particularly at a time when consumer dollars are expected to run dry again soon.

The thing is, these names were already investment worthy in their own right; defense stocks (and I mean defense much more so than aerospace) are among the most attractively-priced equities you can find anywhere right now. Even if the 2011 defense budget was contracted - and it still may be – it would be a modest contraction at best, and the bulk of these companies would still be just fine.

Specific names? Check out the grid below, with which I’ve tried to hone in on the defense names specifically, and weed out the aerospace-heavy or aerospace-exclusive stocks.

It doesn’t take long to recognize that some of the stocks are just undervalued. And now, thanks to President Obama, thanks to the looking defense budget, the number should more than justify higher stock prices for the next couple of years.

Just a thought about one of the few (and I mean very few) pieces of economic data that actually means something.

As far as timing goes, the chart of the S&P 1500 Aerospace/Defense Index pushed off its 100 day moving average after the pullback, and made the move on strong volume. The selling volume was never that strong to begin with either. So, if you’re on board with the general idea, now’s not a bad time to start wading in.

S&P 1500 Aerospace/Defense Index

This is a case, however, where I probably wouldn’t opt for an ETF like the iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA). Rather, I’d go fishing for a low P/E name with strong margins and growth…. maybe something like Alliant Techsystems (ATK) or CPI Aerostructures (CVU). Your call.

Insight Enterprises, Inc.

Insight Enterprises, Inc. (NASDAQ:NSIT) managed to resist the market-wide selling last and took advantage of the semi-bullish environment this week. At this point in time, the would-be buyers need to get off the fence.

On the technical side, Insight Enterprises managed to push back above its 50-day moving average line in late January. Moreover, the stock tested that line – successfully – as support over the last three weeks… gaining 7.5% in the process. In comparison, the broad market is down 2% for the same timeframe. The relative strength alone should be compelling to bulls; the action at the moving averages says the time is right.

Insight Enterprises, Inc. (NASDAQ:NSIT)

On the fundamental side, the strong chart makes sense.

Insight Enterprises, Inc. is a loser on a trailing-twelve month basis, but the company has been profitable in its last tree quarters. A terrible quarter four quarters ago is dragging down the whole year, but many investors who use full-year ’sort and scans’ don’t realize that once the company releases its next earnings report, that loss of $3.76 per share in the second quarter of 2007 will no longer be part of the trailing-twelve months; the TTM number should then be a nice $0.93 per share.

At a plausible EPS estimate of $1.04 for 2010, NSIT really is underestimated and undervalued at its current price.

LCA-Vision Inc.

It’s been a long-time in the coming, but LCA-Vision Inc. (NASDAQ: LCAV) is actually trending higher now. In fact, a series of technical buy signals fired following Tuesday’s big 8% rally. Among the key signals include a simultaneous cross back above the 20, 50, and 200 day moving average lines.

Though slightly overbought in the short-term, and with a suspicious lack of volume behind the intra-day swing, LCAV still represents an enormous long-term rebound opportunity now that the paradigm shift is in place.

Note that LCA-Vision will likely meet turbulence near the resistance level around $8.00. Waiting for a cross above that mark would be wasted time, so it’s not advised to hold off on a purchase until that hurdle is crossed. Just know that the area could be an obstacle when the time comes.

LCA-Vision Inc. (NASDAQ: LCAV)

The most advantageous aspect of this chart is the incredibly slow pace at which the reversal happened… a slow, bowl-shaped move. Given that rebounds tend to mirror the selloff, investors can reasonably expect LCAV to slowly continue building momentum over the next several months.

As far as corporate performance is concerned, that’s LCA-Vision’s Achilles’ heel. For 2009, the company lost $33.2 million, or $1.79 per share. That’s disastrous in comparison to the loss of $6.6 million, or 36 cents per share, in 2008. Yet, the Q4 ‘beat’ offers a glimmer of hope for a turnaround.

The estimated loss of $0.73 per share for 2010 still stands, but that clearly didn’t stand in the way of Tuesday’s buying; perhaps the buying will become more deserved as the year wears on, and Tuesday’s bulls were acting preemptively.

To really make this point (and to offer some perspective) I’ve plotted the Dow, the S&P 500, and the NASDAQ Composite on the chart below. I’ve also added two sets of support lines. The red ones are the longer-term support line that had been guiding the market higher since June’s low. The blue ones are shorter-term, stemming from the lows made between September and November (and these are the ones that gave the market a little more wiggle room for a pullback).

As you can see, all the longer-term support lines were broken a few weeks ago. Two out of the three short-term lines have been broken as well. Only the NASDAQ hasn’t slipped under its short-term support level, but even a small move lower from here would do the job.

Major Indices Breaking Support Lines

No big deal, as we’ve been planning on things getting worse for a while. This is just perspective on how that’s taking shape. The dark green horizontal lines are my tentative target areas.

That’s not what I wanted to talk about today though.

Perspective on New, Continuing Claims

I love the media’s ability to sensationalize anything. The latest round of it came this morning with suggestions that the slight upticks in new and continuing claims was iron-clad evidence that we’re in the verge of the next Great Depression (my paraphrasing). While any job loss is painful, and while a new Great Depression may well be in the cards, the media may want to think about how inconsequential the numbers really were.

Oh, don’t get me wrong – I know they sound huge. Between 4.6 million ongoing unemployment claims and 480,000 new unemployment claims, it ‘feels’ earth-shattering. What they didn’t tell you is that both are still running about 1/3 less than they were in mid-2009.

As you know, I love charts, but I’m not really a chartist at heart. I use charts because it’s a way for me to organize and interpret a lot of information very quickly with much-needed perspective.

You know what the charts of new and continuing claims tell me right now? That despite the disappointing and higher-than-hoped job loss numbers over the last few weeks have been tough to digest, they’ve actually just been trending flat. Moreover, the bigger trend is still one that’s driving these figures lower. Take a look.

Unemployment Claims Data

Don’t get me wrong – I’m concerned too, since all major reversals start out as small blips. At this point in time though, the only thing we have with the claims data is a blip in a much bigger downtrend.

And you want to know the really stunning part that the media tends to not mention? The continuing claims data is two weeks old when you get it; the new claims data is a little less than a week old when announced. A lot can happen (for better or worse) in the meantime.

All the same, I’ll continue to watch these claims charts for a troubling move higher, but what we’ve seen so far isn’t troubling. Likewise, I still contend the markets got a little more ground to give up, but it’s not necessarily the beginning of a new bear market.

By the way, if you’re interested in learning more about how to actually use economic data as an investor, be sure to attend Friday’s webinar…
Click here to reserve your spot in the webinar!

Wireless Handset Trend is Encouraging

Let me first acknowledge that the two wireless industry data charts Morgan Keegan & Company Inc.

The first chart lets us know that top line sales (and this data includes Apple’s iPhone sales) have been trending stronger since the first quarter of 2009, and are almost on par with late 2007’s peak sales volume.

The second image lets us know that earnings increases are following that lead. In fact, EBIT margins are as storing as they’ve been since mid-2008, and are on pace to just keep getting better.

Not only does this point to a recovery in consumer spending, it particularly bodes well for handset makers. That said, this will also drive a wedge between handset makers. Nokia (NOK) shares have held their own in recent months, while QualComm Inc. (QCOM) shares have paid the price for disappointing numbers (though the numbers really weren’t bad in comparison). Taiwan Semiconductor (TSM) hasn’t been lighting it up either, and though Motorola (MOT) shares have taken a hit, today’s perk-up may be the beginning of a rebound effort.

However the individual companies shake out, the industry-wide numbers are supporting growth for at least some of these outfits.

Industry Breakout Alert

I’ve said it before, but it bears repeating now … picking the right industry is just as important as pocking the right stock, since an industry’s ‘tide’ influences about 50% of a stock’s overall movement.

With that in mind, a couple of industry charts caught my attention this week as potential breakout groups. (Just bear in mind an industry breakout for me is something measured in weeks or months – not days. I’m looking for longer-term trends for investors.)

Anyway, there were two groups that stuck out as places you might want to look towards next to find trade-worthy stocks.

Insurance Brokers

This is sort of an oddball group I’ve always liked because of the consistent profit margins we usually see from them. Their stocks, however, couldn’t seem to get a break….. perhaps until now.

Though it hasn’t happened yet, the S&P Small Cap Insurance Broker Index is oh-so-close to braking above a ceiling at 164. When and if it does, look out above.

Restaurants

Much like the insurance broker chart, the S&P SmallCap Restaurant Index is very close to breaking above a ceiling that’s been in place since mid-2008. If that resistance at 311 can be snapped, I believe these stocks will start to move much better as a group…. led by the best of the best, of course.

And which are the best? Great question. For some reason though, Denny’s Corporation (DENN) keeps making its way back on my radar.

Side note: There’s an upside-down head-and-shoulderish thing going on with this chart of the S&P Small Cap Restaurants Index, which bodes bullishly.

In short, no surprises. The bulls, sympathetic bargain hunters, were active early in the day, but when push came to shove (i.e. when the buyers had to commit to those stocks overnight), the dip into the red late in the day said these buyers weren’t totally confident with the market just yet.

There’s an irony to it as well. After the closing bell rang, Yahoo’s (YHOO) Q4 numbers came in better than expected. The company earned 11 cents per share - in line with estimates – versus the loss of 22 cents per share for the same quarter a year ago. The current quarter’s outlook was encouraging too…. an expectation for a 3% increase in revenue.

As for what this means for Wednesday, I think the buyers are going to be active again – maybe even more so than Tuesday. I’m still not buying into it though, no matter how hot it looks during the day (or maybe even the week). Remember, we’ve yet to see a good, healthy, capitulatory-type of low hit… the kind that really casts doubt on the market’s health. So far, we’ve only seen a blip; we’ve seen support around 1085 for the S&P 500. That’s not enough to really give us the needed readjustment to lofty expectations.  Like I said before, a move towards something around 1030 would make a little more sense in the long run.

S&P 500 Vs. VIX

In the bigger picture, don’t forget the point of all this micro-analysis is to better pinpoint the bottom. It’s only apt to be a few percentage point worth of difference, but o we can do that a couple of times per year, it adds up quickly.

Visit the prior write-up to better understand what the bigger-picture plan is. I may have an update later Tuesday or early on Wednesday.

Why the interest? Because that’s where most of our stock trading ideas are going to come from.

Just a quick explanation…. these EPS estimates are built on the assumption that the index is a company itself, consisting of one share. More importantly, the red lines are the actual earnings per share, except when framed by a yellow highlight, which indicates it’s a projected value.

The horizontal blue line is last quarter’s (from whet we know so far anyway) earnings per share. I plotted it primarily to show you where operating earnings stand in relation to where they used be. In both cases, we’re close to 2007’s and 2008’s operating earnings levels… an encouraging sign.

In any case, here’s a look at the S&P 600’s aggregate results.

S&P 600 Small Cap Index, With Earnings

And, here’s a look at the S&P 400.

S&P 400 Mid Cap Index, With Earnings

It’s an interesting reality check, as many investors have convinced themselves that no company will ever turn a profit again. Not only will they, they actually have been! While I still feel the 2010 EPS projections are too aggressive, in light of the real results we’ve seen in 2009, they aren’t completely out of line.

On that note, you should know these numbers are based on operating results, and not GAAP results… which is where all those ‘one-time charges’ can take a toll. The actual GAAP results data isn’t available at this level, but based on the divergence between operating and GAAP results that I’ve seen for the S&P 500, I’d guess that the actual GAAP/reported earnings will be rolling in at about 30% below the operating results you see here. Prior to 2007, that disparity was only on the order of about 5% to 10%.

Still, even if the true bottom lines for these companies are only about 2/3 of the earnings estimates we’re seeing here, that’s still something worth investing in.

None of this will halt the short-term pullback that was set into motion last week, but this is bullish in the bigger picture.

The chart below is basically the same chart I showed you earlier in the week after the other major pullback. What I said then still stands though – the market is overbought, pushing its luck, and ripe for a dip. At this point, I think we need to plan for a pullback to the lower support line at 1084, where the lower edge of the recent trading range is. Take a look.

S&P 500 Vs. the VIX - 01/15/10

What I’ve added for today is another support line (red, horizontal), and the VIX (which I talk about only occasionally).

I bring up the other support line - which incidentally is at 1033 – is another target level, should 1084 fail to hold the market up. The idea of a dip of that size sounds painful. It’s really not though. It would be the result of only about a 9% loss from current prices, which is actually the normal correction for a bull market [we've been spoiled in that regard].

Now, I don’t know which floor will end up doing the deed. I actually hope it’s 1033, as that would clean up a lot of excess bullishness and euphoria that are keeping things choppy now. And, it would also be a great entry opportunity for new trades that would fill up the remainder of our rather sparse portfolio. As you might understand now, that’s why I’ve not been looking for any trades of late… no need to step into now what will be on sale in the near future. After a dip though, we’ll start picking things up.

As for the VIX (or CBOE Volatility Index), that’s the other reason I’m expecting more downside in the near future.

Despite the pullback, investors are still basically fearless – according to the VIX. You don’t have to look too far back to find that the major bottoms of late were made when the VIX was at a peak. The VIX right now is barely off a low, indicating a stunning amount of confidence that needs to be adjusted. We started to do that Friday, but the jobs not done yet.

In any case, that’s ‘The Plan, Part 1′. Look for ‘The Plan, Part 2′ next week. There are some certain sectors and industries I’d like to target with our next major holdings, but timing the entry will depend on how those index charts take shape along with the chart above.

I know the short-term feel may seem a little out of place for a longer-term portfolio like ours. Like I said earlier in the week though, winning the war means winning most of the battles. This is a battle, and one that should be worth fighting.

Readers who’ve been around for a while will know our strategy is longer-term in nature, but we choose to use peaks and bottoms as entry and exit points. Those nickels and dimes add up, and if you win enough battles, you’ll eventually win the war.

I bring the analogy up to reiterate that one bad day for stocks is a battle…. not a war. For that matter, it’s not even a complete battle.

The chart of the S&P 500 below plots some pretty clear - and pretty reliable (so far) – trend lines. As you can also see, the S&P 500 was also pressing its luck with the recent push into the upper edge of this bullish zone. Well, its luck ran out today.

From here, the S&P 500 could (dare I say ’should’?) fall back to 1090 or so, where the lower edge of the zone, or support line, is. Maybe it will fall right under it. Maybe it will bounce off of it. Or, maybe it won’t touch it at all. Based on history and odds though, I think we have to be realistic about out expectations….. both good and bad. Bull trends have survived worse, and not that long ago either.

Today is just the first day of a battle that’s favoring the bears. The bears could win a few more days, and it still wouldn’t break the bigger-picture uptrend. … and that’s the war we’re more interested in. In fact, losing the battle could be a good thing, by giving us a chance to pick up some stocks on the cheap.

Just some perspective.

S&P 500 - 1/12/10

With that in mind, and based on Standard & Poor’s data, here’s a comparative P/E snapshot of where things were, and where things are expected to go. Do with it what you will, which is perhaps nothing. If you’d like a little more perspective on what the numbers mean, then be sure to attend this Tuesday’s webinar (details below). This will be a repeat of the one we did Saturday, which was well received.

Market Cap Valuation

As for style (growth versus value), we have less of a history on that front, but just as much detail. It’s here we can see exactly were some of the past and future problems seem to lie with small and mid caps.

Again, do with the info what you will, but if you’re looking for some specific opinions on what it means and what to do about it, I’ll be talking about it on Tuesday.

Style and Market Cap Valuation

That ‘trend’, of course, has taken a few months to develop. Despite what the talking heads on TV say when the data is announced each month, the month-to-month data means very little. To do you any good, you at least need a few months of confidence data to get a true feel.

In any case, I’ve compared the S&P 500 to the consumer confidence reading for the last several years. When the confidence trend started to rise, I marked it with a blue up arrow. When confidence started to fall, I marked it with a red down arrow. It’s amazing how well those turns in confidence caught the market’s major turns as well.

Now I know what you’re thinking….. no big deal – it’s just a coincidental indicator. And, you’re right – that’s all it is. Where this consumer confidence analysis stands out is that it works as a coincidental indicator far more reliable and consistently than most other so-called coincidental indicators.

Bottom line? We have to be bullish based on the current trend, and the chart’s history. That’s not a daily or even weekly call though, as the trends this data foretells is measured in months or years. Here’s a full-screen version of the chart

Consumer Confidence

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By the way, this is just one of several important charts I’ll be going over in today’s webinar. See the details below, or in Thursday evening’s e-mail.