An article in today's New York Times offers a fairly upbeat view of what Frank Blake, the new chief executive at Home Depot, Inc. (NYSE:HD), is doing to turn around the home improvement behemoth. He is putting the focus back on the customers and trying to undo some of the excess that seems to have occurred under former CEO Robert Nardelli. All in all, it seems like he is moving in the right direction. But I have some concerns about the Husky products that are available exclusively at Home Depot.

Now don't get me wrong, I am not a perpetual Home Depot basher. I love tools -- and they sell tools -- ergo, I love Home Depot. Okay, maybe 'love' is too strong a word, but I have had some positive things to say about the company. Back in November, I noted that my recent experiences have been better and commended an associate who was both extremely knowledgeable and helpful. But a more recent experience has me wondering if Mr. Blake has underlying quality issues that need to be addressed.

A couple of weeks ago I finally worked up the nerve (to tell my wife) that I wanted to buy the 26 gallon Husky air compressor that I had been eying for some time. As usual, she gave me the green light so I headed down to my local Home Depot at first light on a Saturday. I loaded the mammoth box onto a flat bed cart and headed toward the checkout, watching the envious stares of those who weren't also getting a new toy. Unfortunately, that was the last of my good feelings.

In a post on Friday, Brian White noted that McDonald's Corp. (NYSE: MCD) was featured on the cover of BusinessWeek. I read through the article and found it fairly upbeat about the company's prospects. To a contrarian like me though, an upbeat cover story isn't necessarily a good thing. The reason why has to do with expectations.

When positive developments are featured on a magazine cover, the chances are good that this information is already widely known on the Street. In other words, you are likely getting nearer to the end of a trend than to the beginning. (More information about using cover stories as a contrarian indicator can be found here.) In terms of the trend being closer to the end, I think it is also worth pointing out that many on the Street have already jumped on board. According to Zacks, 10 of 15 analysts (67%) currently rank the stock with a "buy" rating.

The article observes that McDonald's has been very successful in defending against competition and I have no arguments with that analysis. However, it is also noted the stock is trading at a seven-year high but no one seems concerned the stock may have gotten a bit ahead of itself. As an example of what I mean, check out the chart below.



This graph plots McDonald's five-year performance (blue line) against that of the broad market, as measured by the S&P 500 Index (red line). For much this time, McDonald's has tended to trade in-line with the market, with the two standout exceptions being early 2003 and now. In 2003 the stock underperformed the market for a few months before "snapping back" in-line. The current situation is opposite in that McDonald's has been outperforming, but I wonder if the same "mean reversion" situation couldn't play out?

Nick Perry is an analyst with Schaeffer's Investment Research.

Over the past few weeks I have seen a bit of skepticism showered on the technology sector. As was noted in a Bloggingstocks post earlier this month, Jim Cramer offered some cautious comments on the group, saying that many stocks were "off limits". I then saw this BusinessWeek article that says Standard & Poor's is calling for a potential 7% to 10% correction in the Nasdaq Composite.

To be sure, this hasn't been a good couple of weeks for individual tech stocks. Companies such as Intel Corp. (NASDAQ:INTC), Apple Inc. (NASDAQ:AAPL), International Business Machines (NYSE:IBM), Advanced Micro Devices (NYSE:AMD), Lam Research (NASDAQ:LRCX), and Symantec (NASDAQ:SYMC) have all seen their stocks hit. Some posted lower-than-expected earnings, some warned, and some saw selling despite seemingly decent results. Each stock drop has helped to weigh on the collective psyche of investors. In other words, each individual sell off has fed into the skepticism expressed above.

As noted earlier, Motorola Inc. (NYSE:MOT) lowered fourth quarter estimates and saw a handful of downgrades. A check of the pre-open action shows the stock is indicated down roughly 10 percent, putting the shares near the lows from last July. In technical terms, a major bottom like the one in July is known as chart support. It represents an area where previous buyers have been willing to step in and buy the stock. A pullback to such support can be viewed as a bullish development, if the stock holds there. However, I am not sure I would be willing to jump on the bullish train without considering a couple of other points.

The first are the downgrades that Melly Alazraki mentioned. As a contrarian I am looking for situations where the Street is getting caught off guard. According to Zacks, 18 of 24 analysts (75 percent) had ranked MOT with a "buy" rating ahead of the warning. There have been a handful of downgrades this morning but there is still a relatively large number of "buys" hanging over the stock. I say "hanging over" because those could turn into downgrades if the company doesn't step up to reassure the Street.

The second point was a recent article in BusinessWeek that touted Motorola's quality-improvement process called Six Sigma. While this is a purely anecdotal read on my part, the upbeat sentiment in the article underpins the optimism seen on the stock. Given the warning last night and the downgrades this morning, it seems that a "resetting" of expectations may be underway.

For another Bloggiong Stocks take, see Eric Buscemi's earlier post.

As the year draws to an end I thought it might be interesting to check in with Bernie Schaeffer, my boss, to get his thoughts on the short-term outlook. I asked him about his near-term outlook and he had three concerns about the action during the next few weeks.

The first concern is based on the level of optimistic comments being made by analysts. Tracking this form of "anecdotal sentiment" is time consuming as it requires constantly staying abreast of what is being discussed, but it offers a look into the mindset of the Street. When the expectations get one-sided, it can be warning sign to watch out for potential disappointments.

The second point of concern comes from the options market. Among other uses, options give investors a way to speculate and hedge. Monitoring the activity can give another perspective on what market players are feeling and expecting. The current data reveal a slant toward optimism as speculators have a preference for calls in some indices. Comparing the relative pricing of call options to put options also suggests optimism, as we have seen a contraction in the typical negative volatility skew we track.

His last point of concern is based on underlying deterioration in the small-cap area. The Russell 2000 Index (RUT) has turned lower after pushing to the 800 level, but most of the attention has been on the narrowly focused strength in blue-chip stocks.

Taken as a whole, it seems that expectations may have gotten a bit ahead of themselves, which opens up the possibility of some short-term volatility. However, Bernie is quick to point out that he is quite bullish about the overall outlook for next year. In BusinessWeek's poll of 80 strategists, Bernie maintains the highest year-end target for the Dow Jones Industrial Average. Calling for a new all-time high in the average, he does expect the economy will slow down next year, but believes that is already factored into expectations.

Nick Perry is an analyst with Schaeffer's Investment Research.

When discussing "blue chip" companies, General Electric Co. (NYSE:GE) is probably a name that quickly comes to mind. The stock is a long-time member of the Dow Jones Industrial Average and is among the heaviest weighted equities in the S&P 500 Index. However, despite its standing, it appears the shares are having trouble keeping up with broad market. The two-year chart below shows the performance of General Electric [blue line] plotted against the S&P 500 Index [green line] and the Dow Jones Industrial Average [red line].

What this graph shows is that GE has failed to keep pace with the indices. While the broad market barometers are showing gains in the range of 15% to 20% over the last two years, General Electric has been treading water. This is worth noting because it shows the opportunity cost of holding the stock, as opposed to buying a broad market ETF like the SPDR (SPY) which tracks the S&P 500 Index.

In a situation like this, you could view the underperformance in a couple of different ways. Some may be bullish and expect a reversion to the mean where GE gains ground to catch up with the broad market. Others, however, may view this failure to rally with the market as a warning sign that investors are losing faith in the company's growth prospects.

As far as the Street goes, it seems they are looking for a reversion to the mean situation. According to Zacks, 11 of 14 analysts (79%) currently rank the stock with a "buy" rating.

Nick Perry is an analyst with Schaeffer's Investment Research.

Before the opening bell, Melly Alazraki touched on some of the retail sales figures and reactions and I thought it might be interesting to update the graph I posted on Monday. The chart below shows the top and bottom performing stocks from the close on Wednesday, November 22.



When we looked at this data earlier in the week, we saw that the bulk of the returns were flat to lower. With the new sales figures now rolling in, along with some earnings reports, we see some stocks are starting to emerge as winners. DSW Inc. (NYSE:DSW), Dress Barn (NASDAQ:DBRN), and Hot Topic (NASDAQ:HOTT) are currently showing gains of at least five percent from where they stood ahead of Black Friday. DSW, the strongest stock on my list, reported better-than-expected earnings of 36 cents per share last night. The shares gapped higher on the open to tag a new high.

The bottom of the graph shows that Christopher & Banks Corp (NYSE:CBK), Bebe Stores (NASDAQ:BEBE), and Coldwater Creek (NASDAQ:CWTR) appear to be struggling through this holiday season.

When you look past the specialty stocks above, it seems that there is still an overall downside bias in the mainstay retail area. Well known names such as Amazon (NASDAQ:AMZN), Federated Department Stores (NYSE:FD), Sears Holding (NASDAQ:SHLD), Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY), The Gap (NYSE:GPS), Target (NYSE:TGT), and Home Depot (NYSE:HD) are still trading below their pre-Black-Friday levels.

Nick Perry is an analyst with Schaeffer's Investment Research.

Apple Computer Inc. (NASDAQ:AAPL) and Google Inc. (NASDAQ:GOOG) are both top heavy with "buy" recommendations. According to Zacks, 13 of 17 analysts (76 percent) rank Apple with a "buy" rating, while a Google is a veritable love-fest with 20 of 21 analysts tripping over themselves to give the stock a "buy" rating. As a contrarian, you might think that this would leave me a screaming bear, but that's not true in this case.

In the past, I have argued that stocks trade on emotions. For example, it's not the actual earnings number that drives the action, but it is how that number compares to expectations that motivates the buyers and sellers. In turn, that reaction spurs more emotion which can help lead to the outsized reactions we sometimes see as investors chase rising stocks and panic out of decliners.

I believe this scenario holds for most stocks, but there is a small group that trade on something else. If a "normal" stock trades on emotion, then perhaps this select group is best described as trading on pure adrenaline. Adrenaline spiked with whatever drug that makes adrenaline more frenzied. Specifically, I am talking about stocks like Apple and Google. Stocks with a "story" behind them. Stocks that captivate imaginations and elicit strong emotional responses when you talk about them. During the tech run-up of the 1990s, we called these "momentum" stocks.

The reason I bring this up is that both Apple and Google popped up on a screen I ran to find companies that were heavily favored by analysts. However, experience has taught me that trading isn't just as simple as going the opposite of analyst ratings. As I have noted before, I do look at analyst ratings in a contrarian fashion in order to gauge supply and demand, but that is just part of the picture.

In a recent post, I argued that Yahoo!, Inc. (NASDAQ:YHOO) wasn't yet pricing in all the bad news because analysts where still holding pat. Conversely, I suggested that part of the recent surge in Dell Inc. (NASDAQ:DELL) was related to capitulation. By that logic, you might think I would be bearish on Apple and Google, but again, that is not the case.

In situations such as these, I have learned the dangers of betting against the momentum of adrenaline stocks when they are in play. Yes, they may already be heavily favored by the Street, but they still have the ability to draw in a tremendous number of buyers to fuel a run. At some point the momentum will likely fade and new "story stocks" will emerge, but rallies can last much longer than what seems reasonable. As a point of reference, consider that Microsoft Corp. (NASDAQ:MSFT) was once such a story stock. The shares staged a spectacular multi-year run that took the stock from a split adjusted level of next to nothing in the mid-1990s to peak near 60 in 1999. The subsequent action, however, has been more a less a listless drift.

Nick Perry is an analyst with Schaeffer's Investment Research.

The deals and general craziness of Black Friday have already been well-covered in this space, so I thought it might be interesting to turn your attention to the actual stock reactions. My intentions were simple enough (but aren't they always?): grab a list of retail stocks and calculate the returns from the close on Wednesday, November 22, through this morning. Sorting the list would give a quick (but early) overview of how the Street was reacting to the "day."

I have ample data manipulation tools at my disposal, so I figured this to be an easy task. What I didn't count on was not being able to find what I considered to be a satisfactory list of retail stocks. The lists I found were either too broad or too narrow. I wanted the usual suspects like Best Buy (NYSE:BBY), Wal-Mart Stores, Inc. (NYSE:WMT), and Gap (NYSE:GPS), while also picking up some of the smaller players like Bebe Stores (NASDAQ:BEBE) and Chico's FAS (NYSE:CHS). Additionally I wanted to capture some of the brands like Crocs (NASDAQ:CROX) and dELiA*s (NASDAQ:DLIA), while excluding consumer goods producers and fast food restaurants.

Unable to find a list that suited my (admittedly arbitrary) desires, I began to handpick names and compile a list of 72 stocks. The graph below shows the top and bottom performing stocks through noon today.



Blue Nile (NASDAQ:NILE), Pier One (NYSE:PIR), and Coldwater Creek (NASDAQ:CWTR) are the weakest stocks, while Lowe's (NYSE:LOW), American Eagle Outfitters (NASDAQ:AEOS), and Jo-Ann Stores (NYSE:JAS) are the strongest.

As you can infer from the graph, the bulk of the returns are flat to lower as two of the "best performing" stocks, Aeropostale (NYSE:ARO) and Limited Brands (NYSE:LTD), show a loss. In other words, buying just ahead of Black Friday doesn't seem like it would have been a good short-term trading strategy. Going forward though, I would expect to see some stocks distinguish themselves and separate from the pack. With my list now created (and saved!) it should be much easier to track. If there is interest in this, I can post periodic updates.

Nick Perry is an analyst with Schaeffer's Investment Research.

As Melly noted earlier, Dell Inc. (NASDAQ:DELL) reported better-than-expected earnings, which spurred upgrades from Bear Stearns and Needham. Dell shares gapped up nearly 10% at the open to trade at the best levels since mid-April.

As a student of the market I am fascinated to watch how emotions ebb and flow around stocks. I am, of course, biased to this particular approach after spending a decade working with Bernie Schaeffer. As Amey Stone discussed back in July, his view is that sentiment can be used as a contrarian indicator. One way to view contrarianism is to simply think of it as looking for situations where there is a potential to catch investors off guard. In the case of Dell, we can see how this ebb and flow of expectations set the stage for an upside surprise.

Earlier this month, we discussed how analysts had largely walked away from the stock. As I said at the time, the fact that many were watching the stock but still sitting on the fence with "hold" ratings suggested that they could be enticed back into the stock and offer upgrades. Any upgrades then had the potential to pull money in both from the clients of the brokerage houses and also from those watching the news and seeing the upgrades.

Last week, we then discussed the idea that the market is a discounting mechanism. I was only half joking when I said the stock had everything but the kitchen sink thrown at it this year. (But fully joking about producing cigarettes wrapped in asbestos!) Yet despite the earnings delay and probe news, the shares were still holding above the July lows.

All of this hinted to fairly low expectations and opened up the possibility for the stock to surprise on the upside. I think it is also worth touching on the idea of how simply removing uncertainty can help boost a stock. Aside from posting better-than-expected numbers, the earnings report also removed some (but definitely not all) of the questions surrounding the shares. The SEC probe is still hanging overhead and questions of growth still remain but having an earnings report in hand helps at least some on the Street to feel better about recommending the stock.

Nick Perry is an analyst with Schaeffer's Investment Research.

Earlier today, Banc of America Securities offered some upbeat comments on American International Group, Inc. (NYSE:AIG). BofA called AIG "a turnaround story" and initiated coverage with a buy rating, citing improving fundamentals. However, my concern is that perhaps the stock has run too far, too fast. At least over the short-term.

Without a doubt, the longer-term outlook for the company has improved. Throughout much of 2004 and 2005, the stock was plagued by concerns over accounting and conduct practices. With those issues seemingly cleared up, the shares have found their footing. Earlier this month, the company reported better-than-expected earnings, which helped to boost the stock to a new annual high. While the improving fundamental story is encouraging, it would seem that this is far from being a secret on the Street.

Heading into today, data from Zacks showed that 9 of 13 analysts (69%) had already ranked the stock with a "buy" rating. Furthermore, a check of the chart shows that the shares have already had a sizable run-up over the last few months, gaining nearly 25% off the mid-July lows.

This short-term move is not out of line with what AIG's competitors have done over this time, but that is still a fairly large run for a stock of this size. In other words, this could be a situation where the stock has gotten a bit ahead of itself over the near-term.

Nick Perry is an analyst with Schaeffer's Investment Research.

Earlier this week, Halliburton Company (NYSE: HAL) was in the headlines as the company that spun off part of a subsidiary, KBR, Inc. (NYSE: KBR). That IPO raised nearly $500 million. Today Halliburton is back in the spotlight. This Barron's article [subscription required] offers an upbeat outlook for the stock. It is argued that the spin-off, which will be completed next year, will allow Halliburton management to focus on its core operations.

I won't disagree with the fundamental argument that the stock trades at a discount to some of its peers. But I do have a concern about seemingly high expectations for the stock. It appears that the stock is already heavily favored by analysts. According to Zacks, 13 of 16 analysts (81 percent) rate the stock with a "buy" rating.

As I recently discussed, I look at analyst ratings in terms of supply and demand. If everyone already "loves" a stock, that means a steady stream of new money will need to find its way to the shares in order to fuel a rally.

Halliburton is far from being an "undiscovered" gem and this optimism hints that expectations for the stock may be high. Lofty expectations do not dictate that a stock must decline, but it does make it more difficult to surprise on the upside and potentially raises the stakes should it disappoint.

In a post last week I noted some of the turmoil and trouble this year that has pressured shares of Dell Inc. (NASDAQ:DELL). There has been no shortage of bad news on the financial front as Dell has warned on earnings and posted generally lackluster results. And if the financial front hasn't been bad enough, the company has had to issue a battery recall to allay the well-publicized fears that laptops will spontaneously combust. Now we find that the company has delayed their earnings release and is dealing with a "formal" SEC probe. It would appear that the stock has had everything but the kitchen sink thrown at it.

Unless it is going to announce it had a secret division that produced cigarettes wrapped in asbestos, I am not sure what else is looming on the news front. All this makes it hard to be bullish on the stock, which may help explain why we have seen analysts back away from the shares this year.

However, I think it is worth discussing the concept of the market being a discounting mechanism. If you aren't familiar with this term, it simply suggests that people are forward looking and make decisions based on what they expect to happen. If investors believe a stock is going to rally next month they don't wait until then to buy, they buy now.

For example, suppose a company has a new product coming to market and there is some excitement that this will invigorate the stock. You may see the stock run up ahead of the product release but then show a bit of a dip on the actual event. If you have seen this happen first hand, you may have heard this described as a "buy on the rumor sell on the news" situation.

Since the beginning of the year, shares of Yahoo!, Inc. (NASDAQ:YHOO) have lost 30% as the stock has severely underperformed the broad market. To put this in perspective, shares of Google, Inc. (NASDAQ:GOOG) have gained nearly 18% over the same period.

Now we find that institutions may be in the process of giving up on the stock as Fidelity Investments dumped 16 million shares [subscription required] in recent weeks. It is also noted that Fidelity is not the only institutional shareholder to bail out of the stock this year. It would stand to reason that Fidelity's selling has helped to pressure the stock, but as a contrarian, my ears perk up when I hear chatter about signs of heavy selling.

A rush to the exits can be a sign of capitulation, a situation where selling pressure is flushed out of the system. Once the selling has run its course, you have the potential for buying demand once again to assert itself and boost the shares.

Digging a little deeper into Yahoo!, however, shows that the stock may not yet be at the point where everyone has capitulated. According to Zacks, 14 of 23 analysts (61%) still rank the stock a "buy." I say "still" because the percentage of "buys" stood at 78% in January, when the stock was trading near multi-year highs.

Nick Perry is an analyst with Schaeffer's Investment Research.

It will come as no surprise to chart watchers, and general followers of the stock, when I say that shares of Dell Inc. (NASDAQ:DELL) Inc have struggled over the past couple of years. The stock is, of course, well off its early-2000 highs and has been trending lower since December 2004. The driving forces for the downtrend range from lackluster earnings reports to battery recalls and this has left many investors skeptical of the stock's prospects. However, Dell has shown some signs of life recently as it has bounced from the lows hit in July after the company issued downside guidance.


The recent bounce has drawn attention to the stock and an article [subscription required] in today's edition of The Wall Street Journal delves into Dell, saying the company has lost its status as the top world-wide personal-computer maker but then offers an upbeat perspective. The company is putting less focus on market share and giving more attention to buoying profits. The article notes that some analysts are positive on the stock but aren't anticipating the stock will surge higher. What really caught my eye though was the end, where it points out that some analysts remain skeptical.

The subdued expectations from the bulls and the outright skepticism from some bears fits with a theme I have been watching develop over the last few months. The shares gapped to a new annual low on the July earnings warning but the stock failed to see follow-though on the gap and quickly bounced back. Could that have been the beginning of a bottoming process for the stock?