Tuesday, June 26, 2012

Let the Market Lead the Way

On Tuesday, investors heavily sold financial and technology stocks, tagging
the day as the worst Inaugural Day performance ever, yet Wednesday, the very same stocks staged the best rally of the new year. But even though the Dow gained more than 3.5 %, the rally failed to offset Tuesday’s losses.

This didn’t stop Barack Obama enthusiasts from comparing the new president to other presidential icons like Lincoln and Roosevelt, one saying that the president’s plan was “reminiscent of Roosevelt’s New Deal.”

But the rally had more to do with practical things than rhetoric, as buyers emerged following the Senate’s confirmation of Senator Hillary Clinton as Secretary of State and comments from Republican senators on the “certainty” of a confirmation of Timothy Geithner as Treasury Secretary, despite his own failure to pay taxes when due.

Bank of America (BAC) vaulted 31% higher, as word of insider buying circulated. Northern Trust (NTRS) gained 31% on better earnings, and Bank of NY Mellon (BK) gained 23% on excellent quarterly results.

U.S. Bancorp (USB) reported lower-than-expected earnings, but with the rush to buy bank stocks USB still managed to post a small gain. Overall the Financials finished the day over 5% higher.

The Technology Sector was the other clear winner yesterday, led by IBM, which
reported Q4 earnings that exceeded analysts’ estimates by 25 cents. The stock closed higher by more than 11%.

And Abbott Labs (ABT) gained better than 2% following in-line quarterly earnings and reaffirmation of its outlook, which matched prior forecasts.

At the close, the Dow (DJI) rose 279 points to 8,228, the S&P 500 (SPX) gained 35 points to 840, and the Nasdaq (NASD) was up 66 points closing at 1,507.

The volume of 1.7 billion shares matched Tuesday’s volume on the New York Stock Exchange, and gainers outran losers by a factor of 4-to-1. On the Nasdaq, 895 million shares traded, with advancers there ahead by about 3-to-1.

Crude oil for March delivery rose $2.71 to $43.55 a barrel, and the Amex Energy SPDR (XLE) rose $2.96 to $7.02.

The February gold contract fell $5.10 to $850.10 an ounce, and the PHLX Gold/Silver Index (XAU) gained $3.71, closing at $117.16.

What the Markets Are Saying

Bear markets can be tortuous and this one has had an extreme measure of
twists and turns. Yesterday, stocks closed higher erasing most of the losses of the day before when sellers drove the market to a point where it seemed that a test of the November low was almost inevitable.

The significance of Wednesday’s rally is two-fold.

First, it could signal a challenge to my analysis on Tuesday, which concluded that last Thursday’s daily reversal (up) and then the lower low on Tuesday meant that we are still in a short-term downtrend.

Second, regardless of the chart signal, the support line at S&P 500 (SPX)820 should probably be redrawn to reflect the lows of Dow (DJI) 7,939 and 7,936 (Tuesday and Wednesday, respectively) as meaningful support since a break of those lows would most certainly lead to a full test of the market’s low.

So, yesterday’s rally, as impressive as it was, is no more conclusive than Tuesday’s decline since it failed to break the high of Friday. Looking further into the chart is no help either, since the stochastic has yet to issue a buy signal despite being tantalizingly close to it, and the other internal indicators backed off, too.

The CBOE Volatility Index (VIX), however, did fall by more than 10 points yesterday, and that is a significant and bullish move toward stability, and the other internal indicators are very oversold.

So, even though the balance is tipping to slightly favor the bulls, we’ll have to be patient and let the market lead the way since volatility is very high. Anticipating a move in either direction could lead to a loss.

Today’s Trading Landscape

Earnings to be reported include: A.O. Smith Corp, Advanced Micro Devices,
AMCORE Financial, American River Bankshares, AmeriSourceBergen, Associated
Banc-Corp, Avnet, AVX Corp, BancorpSouth, Baxter Int’l, BB&T Corp,
Bottomline Technologies and Brinker Int’l.

Cabot Microelectronics, Canadian National Railway, Capital One Financial Corp, CIT Group, Citizens Banking, City National Corp, Columbus McKinnon, Comerica, Community Bank System, Consolidated Edison, Cubist Pharmaceuticals, Cuisine Solutions, Cypress Semiconductor, Deluxe Corp and Digi Int’l.

Exelon Corp, EZCORP, Federated Investors, Fidelity Southern Corp New, Fifth Third Bancorp, First Commonwealth Financial, First Financial Bankshares, First Financial Holdings, Google, Great Southern Bancorp, Huntington Bancshares, Imation Corp, Interactive Brokers Group, International Game Technology, Intuitive Surgical and ITT Educational Services.

J&J Snack Foods, Janus Capital Group, Kelly Services, KeyCorp, Knight Capital Group, KT Corp, Lockheed Martin, LSI Industries, M&T Bank Corp, Matthews Int’l, MEMC Electronic Materials, Meredith Corp, Microsemi, Microsoft, Monro Muffler Brake, NetScout Systems, Nokia and NSTAR.

OceanFirst Financial, Old Republic Int’l, People’s United Financial, Potash Corp of Saskatchewan, ScanSource, Sherwin-Williams, Sify Limited, SK Telecom, Southwest Airlines, Span-America Medical Systems, SunTrust, Sussex Bancorp, SVB Financial Group, Synaptics and Synovus Financial Corp.

TCF Financial Corp, Technitrol, Teledyne Technologies, Tempur Pedic
Int’l, Twin Disc, UCBH Holdings, Union Pacific, UnitedHealth Group, Valley
National Bancorp, and Zoll Medical.

Several economic reports are due including: the MBA Mortgage Application Refinance Index for Jan. 16, Initial Jobless Claims for the week of Jan. 17 (the consensus expects an increase of 24,000), December housing starts (the consensus expects negative 4.0%), DJ-BTMU Business Barometer for Jan. 9, U.S. Energy Dept. Oil Inventories, and the UAPI Oil Industry Report.

Apple Inc (AAPL) Q1 reported $1.78 versus expected $1.39 and adjusted Q2 expected to 90 cents to $1. Southwest Airlines (LUV) beat estimates for Q4 by 3 cents a share. However, Nokia (NOK) missed its earnings target and posted a 69% drop in net profit on lower sales.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.

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