Short-Term Key: NegativeRead more...

The stock market was jolted at the end of last week by disappointing news from one of our core holdings, General Electric (GE). Most of the media, including the New York Times, headlined this as further evidence that the economy is going to the dogs.

It's not often that this company misses its target. Naturally, we are disappointed by GE's numbers too, especially after its Chairman, Jeff Immelt, had promised that earnings for the year were in the bag – and backed up that promise by purchasing shares for his own account just a month ago.

Looking at GE's results more closely, we do think they shed some light on what's happening in the economy. However, what they reveal is that things are not quite as bad as they appear at first glance.

It's important to note that the bulk of the writedowns that impacted GE's earnings had to do with financial services. GE was also unable to sell certain assets because of credit constraints at other companies.

The other contributing factor was poor sales in the healthcare arena. Some of this was company-specific – certain products were not shipped in time. The remainder was again related to the credit crisis. (Hospitals stopped buying expensive digital equipment towards the end of March.)Read more...

Stock prices rose last week, but if the feeble 0.35% gain on the S&P 500 is the best rally this market can produce, heaven help us if the decline continues. More issues fell than rose, and while the Dow did slightly better, it climbed by not much more than 1%.

Of course, if we wanted a way to excuse Mr. Market for his poor showing, we could point out that the end of the year is approaching, when investors typically do some tax-related selling. This may partially explain the limp performance of the secondary stocks.

However, our Master Key remains firmly in positive territory, partially due to the divergence between financial stocks and utilities. Why is this so? The answer may surprise you … 

THE SURPRISING REASON TO BE OPTIMISTIC ABOUT STOCKS 

Given the importance of financial stocks to the U.S. economy, you might think their poor – dare we say terrible – relative performance of late would be a negative for stock prices. At the same time, you might think that the strong relative performance of utilities, which we consider defensive stocks, was negative.

But in fact, the reverse is true.

The combination of weak financials and strong utilities actually signals more bullish than bearish conditions. You see, the fact that financials are critical to the economy means that their weakness bodes well for future stock prices. (I know, you may be saying “Huh?!” but bear with me.)Read more...