Despite solid earnings from IBM (IBM), Coach (COH), Wells Fargo (WFC), US Bancorp (USB) and State Street (STT), stocks fell in a broad sell-off yesterday. The angst that caused the selling was not the expectation of poor earnings by U.S. stocks, but a move by China to curb lending by several of its key banks.
The rumors of a Chinese move to tighten credit surfaced on Monday, but the restriction on the banks was the first overt move in that direction. And what concerns the market most is that if the move leads to a full-fledged policy of tight money, with the resultant slowdown in the Chinese economy, that could jeopardize the global economic recovery.
And not all earnings were better than expected. Morgan Stanley (MS) reported 14 cents versus an expected 36 cents, and Bank of America (BAC) reported a loss of 60 cents instead of an expected loss of 53 cents.
On the NYSE most of the larger losses were confined to the big international companies. IBM fell 2.9% and scored the biggest percentage decline of the Dow 30 stocks. Alcoa (AA), Chevron (CVX), Microsoft (MSFT) and Caterpillar (CAT) also fell, and each has a large stake in international operations.
Energy stocks were down the most, off 1.7%, and commodities fell as well, but the U.S. dollar gained 1.1% versus a basket of foreign currencies.
At the close, the Dow Jones Industrial Average (DJI) was down 122 points to 10,603, the S&P 500 (SPX) lost 12 points at 1,138, and the Nasdaq (NASD) was off 29 points at 2,291.
The NYSE traded just over 1 billion shares with decliners ahead of decliners by 11-to-4. The Nasdaq traded 705 million shares and decliners there were ahead by almost 3-to-1.
February crude oil fell $1.40 to $77.62 a barrel, and the Energy Select Sector SPDR (XLE) fell 93 cents to $58.87.
February gold fell $27.40 to settle at $1,112.60 an ounce, and the PHLX Gold/Silver Sector Index (XAU) fell $6.61 to $167.29.
What the Markets Are Saying
The Street has many sayings and some carry valuable insights. One oldie-but-goodie is: “Buy on strike news, sell on settlement.” We haven’t seen many strikes lately, but another old-timer, “Buy the rumor, sell the news,” often has impact, and yesterday was one of those days.
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Both of these adages tell investors that stocks usually anticipate an event by moving higher, but fall when the news finally hits the pages of the newspapers (which were yesterday’s blogs).
In the case of strike news, it is the settlement that is anticipated because almost all strikes are eventually settled. So it is telling investors to buy when a strike’s impact causes stocks to fall and sell when the settlement is about to occur, since stocks will have already “discounted” the good news of a settlement by rising in price.
“Buy the rumor, sell the news” is sometimes more difficult for the public to comprehend. Since “good news” often occurs as a surprise, the public learns of it when it is announced, while astute investors may have heard the rumor well in advance, had purchased stock, and were just waiting for the right time to cash in on the good news. (See How to Profit From ‘Sell the News’ Victims.)
Yesterday, when health care stocks tanked after rising for over a week, the public was perplexed as to why those stocks would fall in price following the Senate election results that were viewed as beneficial to the group. But savvy investors, recognizing the possible benefit of a Republican win in Massachusetts and its impact on the health care group, had been buying for over a week, and cashed in on Tuesday and early Wednesday.
Staying abreast of the local and national news is one way to anticipate market developments. But allying yourself with a broker or friend who is an experienced interpreter of developments is another.
As for yesterday’s technical action, all indices held at their respective 20-day moving averages. A momentum on all of the indices is still positive due to a late rally yesterday afternoon except for the Nasdaq, which did end with momentum slightly negative.
Continue to watch these two prime trading indicators for a possible sell signal but, for now, remain long.
Today’s Trading Landscape
Earnings to be reported before the open include: Amphenol Corp., Charles Schwab, Comerica, Continental Airlines, Fairchild Semiconductor International, Fifth Third Bancorp, First Niagara Financial Group, GATX, Goldman Sachs, Home Bancshares, Imation, InSteel Industries, ITT Educational Services, KeyCorp, Knight Capital Group, Legg Mason, LSI Industries, MDS, Meredith Corp., PNC Financial Services Group, PPG Industries, Precision Castparts, Somanetics Corp., Southwest Airlines, Sterling Bancshares, TCF Financial Corp., Union Pacific, UnitedHealth Group, WNS Holdings and Xerox Corp.
Earnings to be reported during trading hours: Con Edison.
Earnings to be reported after the close: Advanced Micro Devices, American Express, BancorpSouth, Burlington Northern Santa Fe Corp., Capital One Financial Corp, Cubist Pharmaceuticals, Digi International, Electronics for Imaging, Emulex, EZCorp, Google, Interactive Brokers Group, International Game Technology, Intuitive Surgical, J&J Snack Foods, Matthews International, Microsemi, NetScout Systems, People’s United Financial, SVB Financial Group, Synaptics and Western Digital Corp.
Economic reports due: jobless claims (the consensus expects 440,000), leading indicators (the consensus expects 0.7%), Philadelphia Fed manufacturing survey (the consensus expects 18), EIA natural gas report, EIA petroleum status report, Fed balance sheet and money supply.
Late news: Continental Air (CAL) reported a loss of 3 cents vs. a loss of 7 cents est.; Fifth Third Bank (FITB) lost 20 cents vs. a loss of 31 cents est.; Imation (IMN) reported earnings of 22 cents vs. a 15-cent est.; Knight Capital (NITE) reported 33 cents vs. a 31-cent est.; Legg Mason (LM) reported 28 vs. a 31-cent est.; PNC Bank (PNC) reported 90 cents vs. a 78-cent est.; United Health (UNH) reported 81 cents vs. a 73-cent est.; and Xerox (XRX) reported 25 cents vs. a 22-cent est.
China reported that their economy expanded 8.7% in 2009 versus a target of 8%.
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