Better-than-expected earnings from some key stocks, a better jobs report, and another day of U.S. dollar weakness yesterday added up to deliver the third gain in four sessions for the key indices. The Dow Jones Industrial Average (DJI) gained 0.6% with household names like American Express (AXP), Caterpillar (CAT), Home Depot (HD), and DuPont (DD) leading the charge higher.
The first big company to announce earnings is traditionally Alcoa (AA), and they didn’t disappoint. The company’s Q3 earnings were reported after the close Wednesday, and instead of an expected loss, AA reported a gain. This and better retail sales numbers helped the materials sector to finish with a 1.8% gain.
Both Abercrombie & Fitch (ANF) and Macy’s (M) rose 5.1% after they reported earnings that were a loss but still half of what analysts had expected. And JCPenney (JCP) and Kohl’s (KSS) raised their sales estimates after reporting that their monthly sales figures improved. The retail sales group gained 1.8%.
But investors are still cautious. The Wall Street Journal reported that the Investment Company Institute stated that a net $4.2 billion flowed out of stock funds in September as $9 billion went into bond funds.
Gold had another big day as futures hit a new all-time high of $1,055.40 a troy ounce. And crude oil gained 3.1% hitting an intraday high of $72.55 a barrel, the highest since Sept. 18.
At the closing bell, the Dow had gained 61 points at 9,787, the S&P 500 (SPX) rose 8 points to 1,065, and the Nasdaq (NASD) gained 14 points to 2,124.
The NYSE traded 1.3 billion shares with advancers ahead of decliners by 11-to-4. The Nasdaq traded 738 million shares and advancers ahead of decliners by 3-to-2.
What the Markets Are Saying
The initial surge of buying took the S&P 500 to its high of the day by noon. But then trading settled down, as modest activity focused on the gold and other commodity-related companies for the remainder of the day. The intraday high of 1,070.67 exceeded the high of the last resistance point in the bull channel at 1,069.62, but failed to reach 1,080.15, the high of Sept. 23.
A pullback today could set up the index for a possible near-term top at 1,069.62, and a pullback to the 50-day moving average and the bullish support line at 1,027. Traders may want to focus on 1,065 since a small triple-bottom on the 5-minute chart appeared there yesterday, and that was the approximate bottom of the trading bar at the close.
But for those who aren’t trading, it’s best to just stick with the trend as long as stocks don’t get too far above their 200-day moving averages and the various support zones hold. For those investors, the weekly sentiment reports will provide clues as to whether the broad market is still being supported by “smart money” and sold by “dumb money.”
Two valuable sources are the American Association of Individual Investors (AAII) weekly sentiment and Advisors Sentiment from Investors Intelligence.
The AAII numbers have been flipping back and forth, and for the week ending Oct. 8, AAII says that 35.09% are bullish and 41.23% bearish. This is a reverse from the last report of 43.55% bullish and 35.48% bearish, but is also a reverse from the week before, and that a reverse from the week before that.
The Advisor Sentiment numbers show that the bulls have moved down to 48.9% from 50.6%, while the bears moved up to 24.4% from 23.6%. Both of these sources still favor a rising market, but their message is not strong, giving the impression that the markets may be slightly overbought.
It seems that whenever the major indices approach the top of the bull channel, to which I have so often referred, the market slows its pace and the sentiment numbers as well as the internal indicators show that a pause or mild pullback is about to occur.
That is where we are now, so traders may want to lighten up while longer-term investors may wish to hedge with calls or purchase protective puts while we wait this out for a better buying opportunity.
Today’s Trading Landscape
Earnings to be reported include Crescent Financial Corp. (CRFN).
There is only one significant economic report due: international trade (the consensus expects $-33.0 billion).
Late news: The Asian central banks intervened overnight in the currency market in an attempt to support the U.S. dollar.
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