Market Preview: Easy Money Made

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Updated from 7:04 p.m. ET to include additional information about after-hours action, Family Dollar's quarterly report.

NEW YORK (TheStreet) -- It seems bulls and bears alike would welcome a pullback at this point.

A little slippage in consumer confidence tripped up U.S. stocks on Tuesday but it's hard to complain about such polite selling after Monday's strong rally.

Still, as winter gives way to spring, the inevitable comparisons with last year's market action are cropping up. While 2011 didn't start out as well as 2012 has, the similarities are undeniable. Sameer Samana, international investment strategist at Wells Fargo, listed a few in commentary released after market close, most notably the winding down of QE2 in 2011 vs. Operation Twist this year and the low volatility trading environment.

"All these factors give us a sense of déjà vu, as the current rally has barely paused within its uptrend," Samana wrote. "This suggests an environment where, in the short term, the easy money has probably been made and the bulk of the rally is probably behind us. We this as an opportunity for traders to trim positions and take profits. As the market works off its overbought condition, we believe a better opportunity to increase equity exposure will present itself."

Binky Chadha, chief global strategist at Deutsche Bank, is also of the mind that stocks need to go down some before making another move higher. He said Tuesday that stocks are likely due for a 3-5% decline "but also a significant further rally."

"The magnitude, breadth and duration of the rally across risk assets and the corresponding collapse in volatility have taken market participants by surprise," he wrote. "Many observers have expressed concerns that it represents a quick reversion to complacency, yet another manifestation of the bipolar risk-on/risk-off behavior typical of the last few years."

Federal Reserve Chairman Ben Bernanke juiced stocks on Monday by hinting that more stimulus may be necessary to combat the problem of long-term unemployment but there's still plenty of skepticism out there that QE3 will come to pass, so it's just prudent to prep a portfolio for what happens when/if the risk-on trade ends.

That goes double when considering how far some of the more shaky market leaders -- names like Bank of America , up 79%; Netflix , rising 76%; and Sears Holdings , soaring 125% -- have run in 2012.

The major U.S. equity indices peaked in late spring last year, eventually being knocked down by Greece's debt problems, the end of QE2 in June, and the repercussions of the U.S. government's game of chicken over the debt ceiling, among other factors. At the very least it makes sense for investors to take a hard look at the fundamentals of the individual stocks they're holding and consider how much upside may be left in the near term.

Apple , for instance, has the earnings growth to back up its surge. The stock reached a new all-time high of $616.28 on Tuesday, and didn't succumb to the late-day round of selling, finishing up 1.2% at $614.48.

It was ThinkEquity's turn to lift its price target on Apple's stock Tuesday, and the firm went to $700 from a prior expectation of $600, citing the strong launch of the new iPad and excitement about future products like the iPhone 5 and Apple TV. The issues with iPad running hotter than its predecessor were also addressed.

"We believe it runs 'hotter' due to an older 3G/4G chipset from QCOM (Qualcomm and also a higher resolution display," ThinkEquity said. "Similar to early concerns around the iPhone4S, we do not believe it will impact the ramp of the new iPad, and we see an intermediate 'fix' in the form of newer 28nm chips from QCOM in 2H12."

Check out TheStreet's quote page for Apple for year-to-date share performance, analyst ratings, earnings estimates and much more.

As for Wednesday's scheduled news, Red Hat is slated to report its fiscal fourth-quarter results after the closing bell, and the average estimate of analysts polled by Thomson Reuters is for earnings of 27 cents a share in the February-ended three-month period on revenue of $291.2 million.

Shares of the Raleigh, N.C.-based open source software company, whose products include a Linux-based operating system application, have surged nearly 29% so far in 2012, and the stock hit a new 52-week high of $54.01 on Tuesday before losing 2.3% to close at $51.90.

Valuation could be an issue if there's even a slight hiccup in Red Hat's numbers as the shares now trade at a forward price-to-earnings multiple of 45.4X compared to 10.8X for other software names like Microsoft and 11.2X for Oracle .

The company has topped Wall Street's consensus view in eight straight quarters, delivering an average upside surprise of 9.25% over that stretch. Topline growth slowed on a sequential basis last quarter though. The sell side is slightly bullish on Red Hat with 14 of the 23 analysts covering the stock at either strong buy (5) or buy (9), but the median 12-month price target sits at $52.

Deutsche Bank weighed in on Monday ahead of the report, saying the stock's appreciation has raised the stakes.

"We expect Revenues/EPS of $291m/ $0.27 compared to street estimates of $291m/$0.27," said the firm, which has a hold rating and a $48 price target on Red Hat. "We expect billings to grow 22% y/y. However, we believe the buy side expectations are much higher, given the strong rebound in the stock to reach an all-time high after it had traded off following the billings miss in the previous quarter. Demand trends continue to be stable and we expect RHT to deliver an in-line quarter."

Check out TheStreet's quote page for Red Hat for year-to-date share performance, analyst ratings, earnings estimates and much more.

Family Dollar will be in the spotlight for its quarterly results on Wednesday as well. Shares of the off-price retailer are up less than 2% year-to-date, closing Tuesday at $58.24. Analysts are looking for a profit of $1.13 a share in the company's fiscal second quarter on sales of $2.46 billion. Guggenheim Securities thinks a miss is very possible because of markdowns pressuring gross margins but it still likes Family Dollar as a long-term play.

"Although we expect a noisy operating performance and would not be surprised to see EPS come in below the $1.13 consensus, we think this is largely anticipated," wrote the firm on Monday. "Furthermore, increased confidence in FDO's growth potential, stemming from the efforts of Mike Bloom and his team, should trump this noise."

Guggenheim, which has a buy rating and a $65 price target on Family Dollar, thinks the heavy discounting is a "one-quarter issue," adding that "We believe that (1) discretionary inventories are clean today and (2) FDO is actively reducing its planned receipts for later in the year."

Other companies slated to open their books on Wednesday include H.B. Fuller , Mosaic , Paychex , Progress Software , and Teavana Holdings .

Wednesday's economic calendar features the Mortgage Bankers Association's weekly application activity index at 7 a.m. ET; durable goods orders for February at 8:30 a.m. ET, and crude inventories at 10 a.m. ET.

The consensus estimate is calling for a 2.8% increase in total durable goods orders, according to Briefing.com, after a decline of 3.7% in January. Ian Shepherdson, chief U.S. economist at High Frequency Economics, is looking for a boost of 2% in total orders, and a 1% rise excluding transportation.

He thinks a month-to-month jump in orders for Boeing will help the total number, and expects the core to rebound after January's drop due to the expiration of the 100% tax deduction for most asset purchases on Dec. 31.

"The underlying trend before then was strongly upwards and we think January's 3.9% plunge will prove temporary," he wrote.

And finally, Sealy is bound to be a big mover on Wednesday after the mattress maker reported a surprise profit for its fiscal first quarter. The stock jumped more than 15% in after-hours action as the company delivered a profit of a penny per share vs. Wall Street's consensus view for a loss of 2 cents.

Sealy cited the strong launch of its higher priced Next Generation Stearns & Foster products, which helped gross margins in its U.S. business.

--Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.

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