Strong earnings from Intel (INTC) and better-than-expected trust data from American Express (AXP) resulted in a broad-based rally yesterday, led by the technology and financial stocks. The Dow Jones Industrial Average (DJI) vaulted to a gain of 3.1%, its best one-day advance since March 23.
Intel’s report was made following the close on Tuesday, when it not only announced earnings that beat analysts’ forecasts, but went on to increase its outlook for Q3. This, coupled with the outstanding report from Goldman Sachs (GS), has persuaded some analysts to believe that capital is more freely available than they thought. The Wall Street Journal said yesterday that “companies are buying equipment as a first step toward ramping up production.”
Yesterday, the financial sector gained 4.1% after lagging for the past four weeks, and the technology sector rose 4.2%. Basic materials, energy and technology gains were in the order of 3%. In the past five trading days the financials are up more than 10%.
The Federal Reserve’s minutes from their June FOMC meeting also helped investors make a decision to spend some of their capital. The minutes showed that members believe that the 18-month U.S. recession will end “before long.”
And the New York Fed Empire State manufacturing index rose to negative 0.55 in July, which is the best reading since April 2008, helped by a turnaround in new orders and shipments.
At the close, the Dow was up 357 points to 8,616, the S&P 500 (SPX) gained 27 to 933, and the Nasdaq (NASD) rose 63 points to 1,863.
The NYSE traded 1.37 billion shares with advancers ahead of decliners by 9-to-1. On the Nasdaq volume totaled 846 million shares with advancers ahead by 5-to-1.
Crude oil for delivery in August gained $2.02, settling at $61.54 a barrel, and the Energy Select Sector SPDR (XLE) closed at $47.59, up $1.63.
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Gold hit a two-week high as a weakening U.S. dollar and a surge in oil prices increased gold’s appeal as a currency hedge. The gold august contract closed at $939.40, up $16.60. And the PHLX Gold/Silver Index (XAU) closed at $141.12, up $6.24, which places it at the midpoint of a channel-up formation with the next resistance at $152.
What the Markets Are Saying
Yesterday’s dramatic advance ploughed through the Dow’s and the S&P 500’s 20- and 50-day moving averages, as well as the bearish channel drawn from the June high. This low-volume pop appears to have negated the head-and-shoulders formation that we identified as early as late June.
And with all of the major indices, led by technology and financials, responding with such vigor, it would be foolish to ignore the possibility that the market has turned.
However, with such low volume and with all of the internal indicators at very overbought numbers, it is too early to say that the rush to buy is anything more than a panic of short sellers covering their positions.
So, as dramatic as yesterday’s rally appears, it could easily turn down just as the January 2003 rally fizzled. We should be reminded that the January ’03 rally then led to a breakdown and even a challenge of the bear market lows only six weeks after making a new high.
So I hesitate to be one of the first aboard the bullish bus since the pattern is historically so odd. Just one week ago prices smashed through a neckline at 888 with an intraday low of 869 and a downside target of around 820. But if this rally continues unabated and results in a close higher than 950, we will adjust our trading methods and run with the bulls.
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Time is our friend, so if the near-term trend turns bullish we will have lots of time to profit from it. But if yesterday’s move is false, then the bulls will be seriously hurt.
For now we will take the more cautious approach and move to the sidelines. Within a few days we should know whether the bull has returned or if the bear has baited and set a very convincing and classic trap for him.
Today’s Trading Landscape
Earnings to be reported include: Amphenol, AngioDynamics, AptarGroup, Aracruz Celulose S.A., Associated Banc-Corp, Badger Meter, Baxter International, Biogen Idec, Cypress Semiconductor, Cytec Industries, Datalink Corp., Genuine Parts, Google, Home Bancshares, Insteel Industries, IBM, Knoll, Marriott International, MB Financial, McMoRan Exploration Co., Meridian Bioscience, MGIC Investment Corp., Nexen, Nokia, Novartis, People’s United Financial, Polaris Industries, PPG Industries, Provident Bancorp, Qatar International Islamic Bank, Renaissance Learning, Simmons First National, Sonoco Products, Tempur Pedic International and Umpqua Holdings Corp.
Economic reports due: initial jobless claims for the week of July 11 (consensus expects -60,000), May Treasury International Capital, DJ-BTMU Business Barometer for July 3, July 3 EIA natural gas inventories and the July NAHB/Wells Fargo Housing Market Index.
Late news: Talks between CIT Financial and the government have failed, so it is likely that CIT Group (CIT) may seek bankruptcy.
The following companies reported Q2 earnings: Harley-Davidson (HOG) with 8 cents versus an estimated 24 cents, JPMorgan Chase (JPM) with 28 cents versus an estimated 4 cents, and Marriott (MAR) with 10 cents versus an estimated 21 cents.
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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.
