There was very little news to move the markets Tuesday, so it seemed that investors were focusing on stories from the day before.
Citigroup (C) was up 5.36% when it was revealed that the sale of its Smith Barney units to Morgan Stanley (MS) will probably be the first in a series of moves that will completely reorganize the struggling company.
But despite the good news in the financial sector, the Dow 30 (DJI) had just 16 of its stocks advance. Alcoa’s (AA) earnings miss accounted for much of the sour feeling and the stock fell by 5.1%.
And another Dow stock, General Electric (GE), continued to receive selling pressure as it dropped almost 6% after Barclay’s said the firm’s Q4 earnings report could be at the lower end of its estimate and that Moody’s (MCO) could then cut its ratings outlook on GE’s debt to negative.
Chairman of the Federal Reserve Ben Bernanke said in a prepared speech that the timing and strength of the global economic recovery was “highly uncertain” and that the next step is to “get toxic assets off the balance sheets of financial corporations … As yet, the financial crisis has no end in sight, given the weak economy.”
Treasury prices were down as a result of the chairman’s statements that the Fed could buy longer-term Treasury obligations to keep loan rates low.
At the close, the Dow Jones Industrial Average (DJI) fell 25 points at 8,449. The S&P 500 (SPX) gained two points, closing at 872, and the Nasdaq (NASD) gained almost eight points, closing at 1,547.
The New York Stock Exchange traded 1.3 billion shares, with advancers slightly ahead of decliners. On the Nasdaq, 801 million shares exchanged hands with advancers ahead by 7-to-6.
Crude oil for February delivery gained 19 cents, closing at $37.78 a barrel, and the Amex Energy SPDR (XLE) rose $1.17 to $47.89. Crude must hold at the present level or break a double-bottom. The next resistance zone for crude starts at $50 a barrel.
Gold (February contract) ended down 30 cents at $820.70 per troy ounce, and the PHLX Gold/Silver Index rose $2.84 to $109.76.
What the Markets Are Saying
After a tumultuous fourth quarter, with high volatility creating chaos almost daily, stocks have settled down. Volume has been low on all of the exchanges and no amount of bad news seems to shake stocks from their lethargy.
But some are saying that the really bad news is yet to come. And maybe they are right.
A glance at the Wall Street Journal’s Market Data page shows that P/E ratios are now at 16.01 for the S&P 500 (SPX) for the trailing 12-month period, with an estimated P/E of 11.96 going forward 12 months.
Those numbers presuppose a 25% drop in earnings from last year, and now some analysts are saying that “average earnings” could fall 40% to 50% from last year’s numbers. If that’s the case, then the stock market could be due for another fall of 20% to 30% from its current plateau.
All of this assumes that the skill of Wall Street’s finest analysts is up to the task of making accurate predictions 9-12 months in the future. After 43 years in this arena, I’m not at all convinced that any analyst is capable of accurately forecasting earnings when so many variables are present.
For that reason, I’ll still read financial reports and analysts’ estimates but I must continue to depend upon technical analysis for my trading and long-term market signals. Yesterday, the internal and sentiment indicators slipped just a bit lower, and so are neutral on all fronts.
And with that shift, it may be time for traders to take a long-side plunge with the goal of reaching Dow (DJI) 9,000. But be careful out there in bear country, since a drop under yesterday’s lows at Dow 8,377 could trigger a quick test of the support at 8,000.
Trading rule No. 1: Never trade with more than you can afford to lose.
Today’s Trading Landscape
Earnings of note to be reported include: Clarcor (CLC), Courier Corp (CRRC), HDFC Bank Ltd (HDB), Mercantile Bank Corp (MBWN), Posco (PKX) and Xilinx (XLNX).
Several economic reports are due: MBA Mortgage Application Survey, December retail sales (the consensus expects negative 1.2%), December retail sales excluding autos (the consensus expects negative 1.5%), December import prices, November business inventories (the consensus expects negative 0.4%), U.S. Energy Dept. Oil Inventories, API Oil Industry Report, and the Federal Reserve Beige Book.
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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.
