The S&P 500’s Next Stumbling Block and The Fed’s Foul Play

There’s no question that 2010 is already proving to be a tough year for stocks. Until this week almost all broad-based stock indexes were down close to 5% on the year, and economic fundamentals don’t seem to be improving much either. That said, not all stocks are having as rough a time of it…

We’ve added two new positions to the Rhino Stock Report’s model portfolio in 2010 – both are currently up on the year with an average of 8.6% gains. But the S&P’s next stumbling block could keep us from adding a third position until March. Here’s why:

A colossal breakdown in the S&P 500 in mid-January caused the index to fall below the 50-day moving average, a key technical support level. And although the market has staged a serious comeback in the last couple of weeks, that 50-day moving average could prove to be too tough of a resistance level right now.

With emphasis on economic numbers – like interest rates and jobs – this week, the fundamentals are driving the market. Since our economic fundamentals have been anything but bullish this year, the chances of seeing a break above the thin blue line are diminished.

That’s not to say that the S&P won’t move above the 1109 level next week – only that it’s going to take more bullish power than we’ve currently got on tap. For us, that means that we’re not going to make any new moves until we see a bounce off the 50-day or a breakout above it. (To learn why that’s significant, watch Planning Your Entries and Exits With Technical Analysis)

The Fed Fouls the Markets

Stocks are trading lower today thanks to the Federal Reserve’s decision to increase a peripheral interest rate after yesterday’s market close. To be clear, the rate (which dictates how much interest banks must pay out in emergency loans) doesn’t have much of an effect on monetary policy – but the change still has investors shaken.

That’s because a rate increase of any sort was so unexpected. The Fed slashed interest rates following 2008’s financial meltdown in order to lower the cost of capital and add liquidity to the seized-up credit market. An increase suggests that economic fundamentals are improved enough to increase the cost of borrowing – something that investors don’t see right now.

Although it’s unlikely the Fed will hike more significant rates, expect investors to continue to be anxious until the next bout of economic numbers comes out and they forget about rates once again…

Our Big Earnings Week

Next week is a significant week for a few of the companies in our Rhino Stock Report model portfolio. Three companies – NRG Energy (NYSE:NRG), J.M. Smucker (NYSE:SJM), and SPX Corporation (NYSE:SPW) – will announce their quarterly numbers to the public. I’m optimistic about all three stocks, so don’t expect a significant change-up in our portfolio positions next week. I’ll fill you in on the results in next week’s Market Recap…

Reviewing Our Open Positions and Taking New Stakes

With earnings season finally drawn to a close, now seems an appropriate time to review our open positions here at the Rhino Stock Report. On the whole, we’ve seen stellar performance from our Rhino plays in 2009, and there are still chances this year to make new gains… But let’s take a look at some older open picks first.

J.M. Smucker (NYSE:SJM): The J. M. Smucker company has been one of our best-performing holdings to date — currently up 58% since it was recommended in April. Smucker has been getting new analyst and investor attention lately following yet another solid quarter of earnings released on November 20. And while those new shareholders have been late to the party, with the stock currently at a 52-week high, I see this one traveling higher still.

SPX Corp. (NYSE:SPW): While SPX Corp has had some trouble delivering the numbers we’ve been looking for in its last couple of quarters, a late November dividend and current 20% gain on the stock serve as a good reminder of why this “boring” stock was worth investing in. Recently, SPX’s CFO noted that the current economy made for a “realistic merger and acquisition environment.” That’s good news for a company that’s made considerable growth through acquisitions… the latest of which was completed on December 10.

Computer Sciences Corp. (NYSE:CSC): While CSC’s latest quarter release seemed comparatively tough at first glance, a closer look revealed that one-time income from the second quarter of fiscal 2009 accounted for a lot of the “decline.” All told, it’s business as usual at CSC, with a seemingly constant stream of new contracts flowing in. At present, the company is our biggest open gain up 65.11% since March.

Molson Coors (NYSE:TAP): This beer maker has been making good on our bets since we doubled down back in March. We’re currently up an average of 21% on the double-sized stake. The brewer’s third quarter was solid, with increased cost savings from its joint venture with competitor SABMiller (OTC:SBMRY). And right now, it looks like the currency conversion issues that plagued us in the first quarter of the year could work in our benefit coming into the fourth quarter — a catalyst that could push shares higher yet in early 2010.

NRG Energy (NYSE:NRG): While NRG is currently our newest position, the stock is performing strongly, currently up more than 8% in the last month. That has been thanks in part to increased analyst interest in the stock on our coattails and strong call option interest that’s stacked in our favor. The company’s pursuit of profitable green initiatives should continue to bode well for us going forward.

Taking New Stakes in Rhino Stocks

I know that new subscribers are looking for guidance on whether it still makes sense to take positions in our open Rhino Stocks, particularly when so many of them are up so much. Right now, the only stock that is still a reasonable buy is NRG Energy. Disciplined investors never chase the market, and our other plays have already had too much time to run ahead.

That said, we’ll be taking new positions in December and January, so there will still be plenty of chances to get into stocks that remain within buying range. Watch your inbox this month and next for my next Rhino play as well as your Technical Analysis webinar.