The financial sector led a broad-based rally yesterday, following an upgrade of Goldman Sachs (GS) by premier banking analyst Meredith Whitney. Strength in the regional banks (+6.3%) and diversified banks (+8.0%) was due to bargain-hunting, which drove the KBW Bank Index (BKX) up 6.5%. Goldman is due to report earnings today.
Banks also made a good showing in the blue-chip category with Bank of America (BAC) rising 9% and JPMorgan Chase (JPM) up 6.8%. However, all 10 of the S&P sectors showed gains of at least 1%.
At the close, the Dow Jones Industrial Average (DJI) was up 185 points to 8,332, the S&P 500 (SPX) rose 22 points to 901.05, and the Nasdaq (NASD) rose 37 to 1,793.
Again, volume was light. On the NYSE, 1.2 billion shares traded with advancers ahead of decliners by 5-to-1. On the Nasdaq, advancers led by more than 2-to-1 on volume of 669 million shares.
August crude oil fell 20 cents to $59.69 a barrel, and the Energy Select Sector SPDR (XLE) rose 68 cents to 1,793.
Gold for August delivery rose $10 to $922.50 amid talk of short-covering rather than any economic news. The PHLX Gold/Silver Index (XAU) rose $2.26 to $132.25.
What the Markets Are Saying
Yesterday’s bounce on low volume is helping to trace out a channel-down situation with tops for the Dow on June 11 and July 1, and bottoms on June 24 and July 8.
As for the S&P 500, even though the dates are the same, the channel is slightly different, with yesterday’s close at the high of the day and through the 200-day moving average and the neckline of the much talked about head-and-shoulders formation.
Just above yesterday’s close are the 20-day and then the 50-day moving averages, as well as the right shoulder of the formation at 962.
The slow stochastic gave a buy signal yesterday, but none of the other internal indicators followed. Volume was again very low, so despite the hoopla over yesterday’s bounce in the financial stocks, it is just that — hoopla.
The overall pattern of every major index is a bearish one, and even though the trail to lower prices may be laced with some winning days, the trend is still down.
The Nasdaq is now in the middle of its channel down, with a top somewhere around 1,850 and the low at 1,725.
Momentum, along with some positive Q2 earnings reports, could encourage buyers to part with some of their money-market funds, but they are doomed to failure.
A Standard and Poor’s technician points out that the breakdown from the head-and-shoulders formation is real, but since everyone is talking about it he wouldn’t be surprised to see a short-term rally. But he says that even though “the path lower may not be seamless” and we could see “a period of choppy trading,” the trend is down, and it is only a matter of time before the trend asserts itself.
And Dorsey Wright & Associates, known for point-and-figure analysis, says that more stocks are forming negative configurations — a major change in their indicators.
Today’s Trading Landscape
Earnings to be reported include: AAR Corp., Altera Corp., AMREP, Goldman Sachs, HDFC Bank, Hi-Tech Pharmacal, Intel Corp., Johnson & Johnson, Life Partners Holdings, Ocean Power Technologies and Yum! Brands.
Economic reports due: ICSC Chain Store Sales Index for July 11, June Producer Price Index, June Producer Price Index excluding food and energy, June retail sales, June retail sales excluding autos, Redbook Retail Sales Index for July 11, May business inventories, July 10 API Oil Industry Report and ABC/Washington Post Consumer Confidence for July 11.
Late news: Goldman Sachs is expected to report before the opening. Analysts are looking for $3.54.
Johnson & Johnson (JNJ) has reported Q2 earnings of $1.15 versus analysts’ estimate of $1.11.
Treasury Secretary Geithner says that the recession “is easing.”
CIT Group (CIT) is attempting to get more money from the government, but so far without success.
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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 his most recent market outlooks.
