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These Five Economic Barometer Stocks Are Pointing to a Higher Market

By: SeekingAlpha
Posted: 10/15/2010 6:13:00 AM
Referenced Stocks: AA;CSX;INTC;JPM;PEP
Investment U submits:

by Matthew Weinshenck

Forget the Four Horsemen of the Apocalypse. While they foretold the end of days, there are five new riders in town, with a new prophecy:

There will be no double-dip recession. The market will rally. The economy will recover.

Five Windows into the Economic World

Quarterly earnings season started a bit over a week ago - on October 7. During the first week of reports, five very important companies released their numbers: Alcoa, Inc (NYSE: [[AA]]), Pepsico, Inc (NYSE: [[PEP]]), CSX, Inc. (NYSE: [[CSX]]), Intel Corp. (Nasdaq: [[INTC]]), and JP Morgan Chase (NYSE: [[JPM]]).

I didn't choose these five companies arbitrarily. They're not only among the first to step up to the earnings plate and set the tone for the season, more importantly, each company tells us something different about the economy…

Together, these companies have a wide geographic reach, a good mix of international sales and enough different products to provide a decent measure of economic health. They also have an interesting short-term impact on the stock market.

So specifically, what do these companies predict?

Why You Should Pay Attention to These Five Earnings Reports

First, all five companies just met or exceeded expected earnings - a significant occurrence in itself. That's because when I reviewed the past 20 quarterly earnings for each company, here's what I found:

When four or more of these companies meet or exceed their earnings expectations, the market rises by 2.2% over the next 30 days. But when only three or less companies post good numbers, the market turns negative.

Number of "Horsemen" That Met or Beat Earnings S&P 500 Return over 30 Days S&P 500 Return over 60 Days
4 or 5 2.20% 2.19%
3 or less -3.90% -4.11%

Of course, the earnings reports of these five firms alone can't drive the entire market over the longer-term. A sample of this size isn't enough to make a categoric judgment.

However, these "horsemen" are influential firms and are important economic barometers. Together, they produce valuable information. And information is what moves the market.

As Frank Holmes of US Global Investors says: "Good partial information early is value-added investment research, while complete information after the fact is low-value reporting that's already priced into the market."

And that's essentially what happens all the time when you invest. It's impossible to have all the information and facts you need, so you make decisions based on what you do have - with partial information in uncertain conditions.

And it works, too…

You Don't NeedAll the Information… You Just Need theRight Information

We've used partial information before. In fact, I used one particular indicator to predict the end of the recession in May 2009.

Result? In September 2010, the National Bureau of Economic Research declared the official end to be June 2009. Pretty darn close.

And just a few months ago, I used partial information to predict five reasons why the S&P 500 will hit 1,350 . The index hasn't got there yet, but it's on the move, having risen 10% since then.

The point is, the earnings reports from Alcoa, Pepsico, CSX, Intel and JP Morgan provide information that we can use to draw a pretty decent picture of the economy.

For example, we might not know exactly what decisions Chinese builders are making, but Alcoa's numbers can give us some clues.

So aside from the headline earnings numbers, here's what these five companies are telling us is happening now - and what could happen next…

Goodbye, Macro… Hello, Micro

What we can say, however, is that while it's tricky to absorb the mass of information on the overall economy and its prospects, breaking it down into smaller bites is much more revealing.

And what these five important companies tell us is that we're shipping 10% more goods around the country… sales are climbing, both in the United States and abroad… capital expenditure is rising in key areas like consumer goods and railroads… and credit card debt write-offs are declining.

Information like this is much more useful than an all-encompassing quarterly GDP number that reports what the economy did months ago (not to mention a number that's far from accurate and is casually revised up and down).

These are real-time details on what's happening around the world - and the details look good. It's what makes these companies the "five horsemen." And it's why the economy and stock market could be destined for a brighter spell.

Disclosure : Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.

Disclaimer : The Oxford Club LLC/Investment U and Stansberry & Associates Investment Research are separate companies, and entirely distinct. Their only common thread is a shared parent company, Agora Inc. Agora Inc. was named in the suit by the SEC and was exonerated by the court, and thus dropped from the case. Stansberry & Associates was found civilly liable for a matter that dealt with one writer's report on a company. The action was not a criminal matter.

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