Despite ugly first quarter numbers showing that the U.S. economy contracted 6%, the stock markets still managed to show a strong gain yesterday. According to economists, the economic data showed that inventory has been slashed and government spending has actually contracted. These events, which were a drag on the econoimy, are one off occurences. Inventories will need to be replenished. The government stimulus programs should be slowly kicking in later on in the year. The S&P 500 index is trading comfortably above its 50 day moving average and will likely test the 200 day moving average at the 1,000 level. The stock markets usually discount events 6 months in advance, and is indicating an economic recovery towards the end of the year. 

In this market where battered stocks are trying to climb out of the cellar, IBM is a star performer. It is one of the very few stocks trading above its 200 day moving average. It is also the stock’s key support level at $100. If this level is broken, support lies at the 50 day moving average at $95. As long as support at the 200 day moving average successfully holds, it could test $120.Fundamentally, the company is doing well in this difficult economy. They remain profitable and have a strong balance sheet. They announced yesterday that they are boosting their dividend payment by 10% and are buying back shares. Buy this stock on weakness.

Even with the major headlines blaring about a potentially fatal swine flu pandemic, it should only be a temporary effect on the economy and stocks. According to economists, the effects from the flu could lop off one half of a percentage point of economic growth. Given that the US economy is already in a deep recession, any negative news is likely to be magnified. Looking at the SARS experience, the economy and stocks will eventually recover. At this time, the S&P 500 recovered from its losses originating from SARS. The reversal of the leveraging of the economy is probably over the halfway point, indicating the worst of the economic contraction is behind us. Furthermore, government stimulus programs will soon be implemented, boosting economic growth.

There is a reason why Warren Buffet, one of the greatest investors of all time, does not buy airline stocks. They rarely make money. The airline industry requires huge amount of capital just to keep operations going. Plenty of competition means that pricing power is limited. As a result, many of the world’s major airlines are carrying substantial debt loads. With the world currently trying to climb out of a major economic slump, the airlines must now deal with the negative ramifications of a swine flu outbreak originating in Mexico. Given the huge contraction in economic activity, it will take some time before the travel business starts picking up again. Investors are better off looking at other sectors to put their money in.

Though the numbers are down, new homes sales in March declined less than analysts had expected. March sales dropped 0.6 percent to an annual rate of 356,000 in March, down 30.6 percent compared to the same period a year ago. The numbers suggest that the housing sector is finally beginning to stabilize. Home prices are still expected to drop given the huge inventory of unsold homes. There is currently a 10.7 month supply of new homes on the market, down from a 11.2 month supply in February. For the housing market to return to normalcy, the inventory needs to drop by half. Home builders are competing with existing homes, particularly those in foreclosure, to win new buyers. At best, the housing market will start stabilizing as the number of unsold homes dwindle but a recovery is a long way off.

AAPL delivered yesterday better than expected results, thanks to the popularity of its iPod and iPhone lines. Margins were stronger thanks to lower costs for components. Because their products are situated on the higher end of the markets, AAPL’s results were held back by the global recession. Once the economy eventually recovers, AAPL profit results should improve. A very positive development for AAPL is that its stock is trading above its 200 day moving average. If this level holds, the next upside target is in the low 140s. Support lies at $119 and $105, which are the 200 day and 50 day moving average respectively. Steve Jobs is expected to come back to work sometime in June.

While its Big 3 counterparts, Chrysler and GM, are likely to declare bankruptcy before the end of summer, Ford is chugging along. Thanks to its move a couple of years ago to shore up its liquidity, Ford is the only Detroit based auto company not needing government bailout to stay in business. The quality of its vehicles are steadily improving. More importantly, their product pipeline is full of promising vehicles that should resonate with the public. They are very well positioned to grab market share particularly from its American counterparts. Goldman Sachs put a buy rating on F with a price target of $6. The stock is currently trading around $4. F is one of the few stocks that are trading above its 200 day moving average. If the stock can hold above $3.50, it is well positioned to go higher.

MSFT is reporting earnings this coming Thursday. With expectations being very low, any pullback in its stock price represents a buying opportunity. A move back to the 50 day moving average at $18 or even below would be good entry points. Looking further out for the software maker, the economy will eventually recover. The much maligned Vista will soon be gone and the new operating system Windows 7 should give a boost to their top line numbers. MSFT is sitting on plenty of cash, allowing them to work through the current recession and make opportunistic acquisitions. Corporate America will eventually begin to start spending again, benefiting MSFT.

There is no doubt that the equity markets had enjoyed solid double digit gains of close to 30% since its March lows. With earnings season upon us, investors want to see what companies are saying about future earnings. The big question is whether the worse for the economy is over. For investors to push stock prices higher, the earnings picture will need to show signs of improvement. This means that the economy has indeed hit bottom and that the credit market is stabilizing. At this point, it is generally believed that the Doomsday scenario is unlikely to occur. Thanks to government intervention by the developed nations, the financial system is not likely to collapse as originally feared. The stock markets will probably consolidate its gains before going into its new direction.

If you believe that demand for technology and that Asia is poised for a healthy recovery, you should look at Taiwan. Taiwan companies are active in the tech sector, particularly in the manufacturing and design of  chips, and have heavy exposure to China. Looking at the EWT, the Taiwan based ETF has broken its downward trend and is now trading at key levels. At yesterday’s close of $9.31, the EWT is at its 200 day moving average. In order for it to continue its upward ascent, the EWT needs to stay above the 200 day moving average. The upside targets are $12, $13 and $14. The downside target is the 50 day moving average at $7. Any pullbacks of this ETF presents an opportunity to buy.