After a brief round of profit-taking that lasted until mid-day, banks and financials again became the subject of buying. Then for three hours the major averages rallied as talk circulated of a big earnings increase from Goldman Sachs (GS).
But in the last 20 minutes of the session, profit-taking hit — driving the Dow Industrials (DJI) to a slight loss for the day while the financial group maintained its gains.
After the close, Goldman announced that it has raised $5.5 billion in capital to fund another private equity operation and a $5 billion public offering of common stock. It also reported Q1 earnings of $3.39 a share versus an expected $1.60 and cut its quarterly dividend to 35 cents a share from 47 cents a share. The shares closed higher by 4.68%.
Financial stocks were able to close with a respectable gain of 4.8% but are still down 11% this year. Citigroup (C) was the percentage leader, up 22%, while Bank of America (BAC) rose 15% and American Express (AXP) gained 8.66%.
The Wall Street Journal reported that a delay in filing for a share offering, which would sharply increase the shares outstanding, caused fewer shares on the market and thus a shortage. This shortage, in turn, caused a “short squeeze” and a “stampede of short-sellers buying back bets against the stock.” Hmm, that sounds familiar — another plot against the short sellers by the bankers.
Two Dow stocks led the selling: General Motors (GM) and Boeing (BA). GM fell 16% on a report that the U.S. Treasury is preparing the auto giant for a bankruptcy by June 1. Boeing fell 5% due to cutting production of its wide-body 777 jetliners due to an “unprecedented” drop in global air traffic.
At the close, the Dow Jones Industrial Average (DJI) was off 26 points to 8,058. The S&P 500 (SPX) gained two points, closing at 859, and the Nasdaq (NASD) rose a point to close at 1,653.
The New York Stock Exchange traded 1.5 billion shares with advancers ahead of decliners by 4-to-3, and the Nasdaq traded 627 million shares with advancers and decliners even. Volume was unusually low due to the Easter Monday European stock market’s being closed.
The May crude oil contract fell $2.19 to $50.05 on a lower demand forecast by the International Energy Agency. The Amex Energy SPDR (XLE) fell 50 cents to $45.10.
Gold for April delivery closed at $894.70, up $12.50 an ounce on concerns about the possible bankruptcy of GM and upbeat economic data from China.
What the Markets Are Saying
After five weeks of advances, while our internal indicators have been hanging at overbought heights for three of those weeks, it is reasonable that some sellers would take advantage of the high prices with a round or two of profit-taking. But instead, Monday turned out to be another day of the financial stocks coming to the rescue of the broader market.
While the internal indicators are now grossly overbought, the sentiment indicators are actually bullish. The CBOE Volatility Index (VIX) has fallen to 37.81, the second-lowest close of the year (the lowest being made last Thursday), and the American Association of Individual Investors (AAII) Sentiment Survey of last Wednesday shows that the public is 44.29% bearish and 35.71% bullish. Thus, the momentum is still positive.
The bankers had another field day with the shorts yesterday. This time, the victims were the short sellers of Citigroup (C) who got bamboozled by the bank when it artificially restricted the number of shares in the market, thus forcing a run of covering by the shorts.
And Goldman Sachs (GS) did a neat little trick, too, by announcing its earnings a day ahead — not quite as egregious as Wells Fargo’s (WFC) act of piracy but the intent was the same.
While this sort of manipulation goes unchecked, traders should stay away from the short side of the financials. It is becoming more obvious that the banks are now flush with cash and earnings surprises could be the norm. Breakouts in the group are widespread with the regional banks still the most undervalued sub-sector.
JP Morgan (JPM) reports earnings on Thursday and Citigroup (C) on Friday. All eyes will be on these reports, since a positive surprise would confirm that the group has turned the corner of negative earnings.
For the present, only very brave traders should play the long side of the industrials and, if they do, with very close stop-loss orders. Also, market orders on the buy side should be avoided. Only enter limit orders on pullbacks to zones that have shown prior support. It’s a jungle out there, so be careful.
Today’s Trading Landscape
Earnings to be reported include: AmeriServ Financial, Burlington Coat Factory, Commerce Bancshares, CSX Corp, Fastenal, Intel Corp, Intervest Bancshares Corp, Johnson & Johnson, Levi Strauss & Co, Linear Technology, and W.W. Grainger.
Several economic reports are due today including the International Council of Shopping Centers (ICSC) Chain Store Sales Index for April 11, March Producer Price Index (the consensus expects negative 0.1%), March Producer Price Index excluding food and energy (the consensus expects 0.1%), March Retail Sales (the consensus expects 0.2%), March Retail Sales excluding autos (the consensus expects 0.0%), Redbook Retail Sales Index for April 11, February Business Inventories (the consensus expects a 1.2% drop), API Oil Industry Report for April 10, and ABC/Washington Post Consumer Confidence for April 11.
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