Gambling on Geithner

In the age of TARP, TALF and other acronyms, government action is the market wild card. For this week’s government intervention, Treasury Secretary Timothy Geithner is expected to announce details of Treasuries plan to purchase toxic assets. And one way or another, the markets will be on the move.

But trying to play react to the government can be deadly. Last week, the Federal reserves sent the market into a tizzy when it announced it would spend over $1 trillion if necessary to buy long term Treasuries and restore the economy. The Standard & Poor’s 500 had been testing a key resistance level around 780, when the Federal Reserve made its announcement. As the news broke, traders pushed the S&P 500 through 780 as if it were cotton candy and the market a swarm of hungry kids at the amusement park, pushing the market as high as 803. The ride was over however by the end of the week. By Friday, the S&P 500 settled in at 768, still 13.6% above its March 9 close of 676.53, but lower than the close the day before the Fed announced its plans for quantitative easing. It’s enough to give an investor whiplash.

So how about ignoring the government altogether?

I talked to Savita Subramanian, Quantitative Strategist at Merrill Lynch, about the market’s rally on Friday and her advice is to stop trying to play the wild gyrations, but instead to find a safe entry point. To do so, she relies on market indicators, data that give a sense of the overall health of the market, that show momentum has shifted from the downside to the upside. For instance, she looks at earnings visibility – the ability to accurately gauge corporate earnings – as measured by analyst estimates. (If analysts tend to agree, that’s bullish. If not, it’s bearish). She also looks at share buybacks to determine if “the smart money” is bullish and bearish. And at the bottom and at last week’s top, they still said the same thing: wait. “All of our indicators are deeply negative,” she says.

That doesn’t mean investors should stay out of the market. Some sectors actually do have strong and visible earnings. They’re still in the defensive sectors – consumer staples and health care. But Subramanian is also starting to see opportunities in the large, blue chip tech companies that are flush with cash. “The old technology companies that have cash look attractive,” she says. “They have ability to weather a liquidity crisis.”

For investors who feel they have to jump in at every sign of an up-tick, Subramanian says not to worry. “Typically you see a fundamental earnings recovery that persists for a cycle a couple of years,” she says. “It’s hard to miss.”

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