On Friday, the Fed disclosed its stress-test methods, and analysts concluded that most banks will have capital enough to be considered “well-capitalized.” But the government didn’t mention any specific banks — that comes on May 4.
Despite the lack of specifics, banks rallied just a bit after the announcement. American Express (AXP) was up 21% by reason of better-than-expected earnings and Bank of America (BAC) rose 3.2%; U.S. Bancorp (USB) rose 3.3% and the KBW Bank Index rose 2.9%. But Morgan Stanley (MS) reported a larger-than-expected loss and cut its dividend.
Ford (F) surprised analysts by saying that it burned through less cash in Q1. This was in stark contrast to General Motors (GM), which said it will close six more plants leaving it with 27 operating plants compared to 47 in 2008. The company also announced that Pontiac will go the way of Oldsmobile, SAAB, Hummer, and Saturn and now seems unalterably headed to bankruptcy while Chrysler will be taken by Fiat.
New unemployment claims for the week ended April 18 came in at the consensus estimate of 640,000, which is up 4.4% from the prior week. Continuing claims jumped 1.5% to another new record.
At the close the Dow Jones Industrial Average (DJI) was up 119 points to 8,076, the S&P 500 (SPX) gained 14 points to close at 866, and the Nasdaq (NASD) rose 42 points to 1,694.
The New York Stock Exchange traded 1.7 billion shares, with advancers ahead of decliners by more than 3-to-1. On the Nasdaq, 878 million shares traded with advancers there ahead by 7-to-3.
For the week, the Dow was off 0.7%, the S&P 500 fell 0.3%, and the Nasdaq rose 1.3%.
Crude oil for June delivery gained $1.93 to close at $51.55 a barrel, and the Amex Energy SPDR (XLE) rose $1.30 to $46.07.
Gold (June contract) rose to $914.10 an ounce, up $7.50 on news that China has nearly doubled its gold reserves since 2003 to be the world’s fifth-largest holder. The PHLX Gold/Silver Index (XAU) rose $6.43 to $125.74.
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What the Markets Are Saying
Despite the gains on Friday, the major indices — except the Nasdaq (NASD) — recorded their first decline since the March lows. And even though the loss was not large, it did trigger a sell signal from the momentum indicator, which is one of the most consistently accurate internal indicators that I follow.
And another troubling sign that I pointed out early last week was the run of buying in the lower-quality stocks, a fact picked up by the weekend edition of the Wall Street Journal under the heading, “Can U.S. Rally Last on a Diet of Junk?”
The Journal went on to say, “While such a junk-stock rally after a massive sell-off isn’t unusual, some say the rebound is going to have to change in character to be led by higher-quality companies. Otherwise, it could falter amid continued economic weakness and earnings disappointments.”
The biggest winners since the March bottom not long ago were U.S. premier banks and financial institutions, and the rebound is no doubt due to the extreme and unreasonable levels to which they were driven.
But now, after six weeks of gains, the market has reached some overwhelming chart resistance. Our internal indicators are very overbought and two — the momentum and stochastic — have given sell signals. However, I could be wrong and buying could again pick up steam. If so, the massive resistance at S&P 500 (SPX) 875 to 900 will be quickly overcome.
Until that barrier is penetrated, though, it is time to be very, very cautious.
Today’s Trading Landscape
Earnings to be reported include: Aaron Rents, Advantest Corp, Albemarle Corp, Alberto Culver Co, Alliance Holdings GP LP, Alliance Resource Partners LP, Associated Estates Realty, Axis Capital Holdings Ltd, Baidu, BE Aerospace, Boardwalk Pipeline Partners LP, Bookham, Celadon Group, Check Point Software Technologies, Coachmen Industries, Compass Minerals and Corning.
Duncan Energy Partners LP, Education Realty Trust, Edwards Lifesciences, Emulex, Energizer, Enterprise Products Partners LP, Fidelity National Financial, First Advantage Corp, First Citizens BancShares, First State Bancorp, Grand Canyon Education, Grupo Radio Centro, S.A. de C.V., GulfMark Offshore, Hanesbrands, Hanger Orthopedic Group, Health Management Associates, HealthStream, Heartland Financial USA, Hexcel Corp, HF Financial and Humana.
iBasis, Interactive Intelligence, Intevac, Inverness Medical Innovations, Kilroy Realty Corp, Kyocera Corp, Ladish, Lakeland Financial, Legacy Bancorp, Liberty Property Trust, Lorillard, Masco, Meritage Homes Corp, Montpelier Re Holdings Ltd, Old National Bancorp, Olin Corp and Omnicom Group.
Parexel, PartnerRe Ltd, Penson Worldwide, Plum Creek Timber, PrePaid Legal, PRG-Schultz Int’l, PrivateBancorp, Provident Bankshares Corp, Qualcomm, Rent-A-Center, Rock-Tenn Co, Silicom Ltd, SL Green Realty, Smith Int’l, SonicWall, SonoSite, Southwestern Energy, StellarOne Corp, Telefonos De Mexico, TGC, The Bancorp, The Timken Co, TranS1, Travelzoo and Tyler Technologies.
Universal Health Services, Valero Energy Corp, Veeco Instruments, Verizon, W.R. Berkley, WABCO Holdings, Washington Real Estate Investment Trust, Washington Trust Bancorp, Wausau Paper Corp, Weingarten Realty Investors, West Coast Bancorp, Whirlpool Corp, Wright Medical Group, and XL Capital Ltd.
The lone economic report due today is the April Dallas Fed Manufacturing Production Index.
Humana (HUM) reported Q1 of $1.22 versus an estimate of $1.18. Swine flu has been reported in Mexico, Spain, and the United States, which is negatively impacting the world stock markets.
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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.
