Last week’s slaughter of the financial stocks (again), which produced losses for the sector of 16%, didn’t seem to perturb investors on Friday. But it wasn’t because the banks rallied on Friday. In fact, Bank of America lost 14% on Friday, Citigroup (C) was down 9%, and JPMorgan Chase (JPM) fell more than 6%.
The Dow (DJI) gained just under one percent, but the Nasdaq (NASD) was up more than a percent, and the gains were attributed mostly to technical market factors, like Thursday’s reversal from the psychologically important Dow 8,000 level and short covering due to expiring January options.
Whatever the reasons for the rally, volume was higher than normal for the second day despite the pending three-day weekend but still highly volatile, with the Dow off more than 100 points by noon.
Then an afternoon rally recovered all of the Dow’s losses and by the closing bell, it had gained 69 points at 8,281. The S&P 500 (SPX) rose six points to 850 and the Nasdaq (NASD) gained more than 17 points, rising to 1,529.
The New York Stock Exchange traded 1.6 billion shares, with gainers ahead by 2-to-1. On the Nasdaq, volume exceeded 1 billion shares but gainers only exceeded decliners by 7-to-6.
For the week, the Dow lost 3.7%, the S&P 500 was off 4.5% and the Nasdaq dropped 2.7%.
The February crude oil contract gained $1.11 at $36.51 a barrel, and the Amex Energy SPDR (XLE) closed at $46.54, up 37 cents.
Gold for February delivery gained $32.60 and closed at $839.90. The PHLX Gold/Silver Index (XAU) gained $5.07 to $113.78.
What the Markets Are Saying
Despite the reversal of last Thursday and the follow-through on Friday, stocks are still just barely above the support at Dow (DJI) 8,000 and S&P 500 (SPX) 820. This line provided support several times in November and December, and a break below it would certainly lead to a test of the market’s closing low at Dow 7,552 and S&P 752.
But with volume on both days higher than normal at more than 1.6 billion on the NYSE, the stochastic poised to flash a buy signal, and the internal indicators are oversold, the chance that the market will move higher is good. But the extent of that move will likely be modest considering the amount of overhead between Dow 8,300 and 8,800 and S&P 820 and 920.
Rather than expect a breakout, investors are still faced with a bear market that is just holding its own. At this stage of recovery (if that’s what it is), the most that can be expected is a small rally and more sideways movement — and there is still the strong possibility of a further test of the market’s lows.
Today’s Trading Landscape
Earnings of note to be reported include: BancFirst (BANF), Capital Bank (CBKN), Cree (CREE), CSX Corp (CSX), Dr. Reddy’s Laboratories Ltd (RDY), Fastenal (FAST), Forest Laboratories (FRX), Hancock Holding Co (HBHC), International Business Machines (IBM), Jefferies (JEF), Johnson & Johnson (JNJ) and Lee Enterprises (LEE).
MGIC Investment Corp (MTG), New Oriental Education & Technology Group (EDU), Omnova Solutions (OMN), Packaging Corp of America (PKG), Parker Hannifin Corp (PH), PetMed Express (PETS), Pinnacle Financial Partners (PNFP), Precision Castparts (PCP) and Pulaski Financial (PULB).
Regions Financial Corp (RF), Renasant Corp (RNST), State Street Corp (STT), Suncor Energy (SU), Supertex (SUPX), TD Ameritrade Holding Corp (AMTD), VIST Financial Corp (VIST) and West Coast Bancorp (WEST).
In terms of economic reports, we can expect the ABC/Washington Post Consumer Confidence for Jan. 17.
The pre-opening figures are lower because of bank worries due to new losses in Europe. Fiat will take a 35% position in Chrysler that could be increased to 50%, but no cash will change hands.
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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.
