Editor’s Note: While Sam Collins is on vacation, we’ve asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook and a trade of interest until Sam returns June 1.
The S&P 500 (SPX) jumped northward 2.84% on Monday and the Dow Jones Industrials (DJI) rose 235 points into a very impressive close.
We started the day with better-than-expected earnings from the second-largest home improvement retailer, Lowe’s (LOW), that helped reassure investors that consumer spending may be stabilizing and the housing market may be improving. Lowe’s CEO Robert Niblock said consumer confidence has improved in recent weeks and housing turnover appears to showing “signs of a bottom.”
Goldman Sachs (GS) upgraded its Bank of America (BAC) rating from “neutral” to “conviction buy” with a price target of $15. Goldman said it is especially excited about the upcoming BAC capital raise and believes it should help remove a key overhanging shadow from the stock. BAC was up almost 10% on the day and the financials were a top performing sector.
We then heard reassuring words from Treasury Secretary Timothy Geithner, officials at the World Bank and European Central Bank. Their comments were essentially along the lines of projected economic stabilization and a resumption of growth in late 2009 or 2010.
American Express (AXP) announced plans to cut 4,000 jobs, or about 6% of its workforce. Remember, job reductions are a lagging indicator. When the economy turns up, the anticipated cost benefit of $175 million in labor savings will show up in upside earnings surprises.
In addition to the labor cuts, American Express announced reductions in investment spending and business development that should save the company an additional $625 million.
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What the Markets Are Saying
Technically, the S&P 500 (SPX) touched its 21-day moving average line on Friday and lifted right back above its 10-day moving average on Monday as market participants regained their appetite for risk. The CBOE Volatility Index (VIX) hit an intra-day low of 30 flat.
The trend is your friend. We are in a bull move until the market says we are not.
The average 12-month return in the S&P 500 from a bear market bottom (like we saw on March 9) is 45%. The range of performance is 29% to 121%. During the full duration of the ensuing bull market, the average return is 164%, so these large moves are to be expected.
Today’s Trading Landscape
Today, we will hear earnings reports from DHT Maritime, Dick’s Sporting Goods, E-House Holdings, Home Depot, JA Solar, KEMET, Medtronic, Opnext, Raven Industries, Saks, Solarfun Power, TJX Companies, Vodafone, Analog Devices, China Techfaith Wireless, Dycom, Hewlett-Packard, OceanFreight, Photroncis, Paragon Shipping, Phillips-Van Heusen, 3SBio, ValueVision.
On the economic front, U.S. building permits (April) and U.S. housing starts (April) will be reported. Consensus estimates were 530,000 and 520,000 respectively but actual figures came in much lower with starts at 458,000 and actual permits at 494,000. Housing inventories are falling but confidence in the housing market has yet to return.
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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.
