Yesterday, the bulls were triumphant as the Dow Jones Industrial Average (DJI) rose to its first triple-digit gain in three weeks, and the S&P 500 (SPX) crushed the overhead at 1,200. The gains also marked the fifth straight session of advances to new 18-month highs.
Earnings were the key to the record-breaking day and started with an after-the-market announcement on Tuesday by Intel (INTC) that it had exceeded Q1 estimates. But Intel is in the technology sector, and many analysts were supporting tech, while estimating that the financial sector couldn’t live up to forecasts. So when JPMorgan Chase (JPM) beat forecasts before the opening and transportation giant CSX Corp. (CSX) did the same, the markets started with a bang. Both JPM and CSX ended the day with gains in excess of 4%.
Bank of America (BAC) rose almost 4% and Citigroup (C) gained nearly 7% as the financial group surged. The KBW Bank Index (BKX) rose 3.4% to an annual high.
And along with earnings, strong economic data also contributed to the gains. Consumer prices in March increased by 0.1% month-over-month, advance retail sales for March increased 1.6% (1.2% was expected), and in its Beige Book of regional economic indicators, the Fed was upbeat about consumer spending, which accounts for more than two-thirds of economic activity.
In his appearance before a Congressional committee, Fed Chairman Ben Bernanke said, “The pace of the recovery this year will depend on if consumers spend and companies invest enough to make up for fading government support.” He was also quoted as repeating the Fed’s pledge to keep interest rates low for an extended period.
At the close, the Dow was up 104 points to 11,123, the S&P 500 rose 13 points to 1,211, and the Nasdaq (NASD) was up 39 points to 2,505.
The NYSE traded 1.1 billion shares, and the Nasdaq traded 767 million shares. Both exchanges had advancers ahead of decliners by more than 3-to-1.
Crude oil for May delivery rose $1.79 to $85.84 a barrel on a surprising drop in U.S. inventories that analysts say may signal the end of a temporary glut. The Energy Select Sector SPDR (XLE) gained 57 cents, closing at $60.33.
June gold rose $6.20 to settle at $1,159.60 an ounce on the positive U.S. economic data. The PHLX Gold/Silver Sector Index (XAU) gained 1.16 points, closing at 174.87.
What the Markets Are Saying
Even though the CBOE Volatility Index (VIX) is close to a three-year low (not good) and the Relative Strength Indices (RSI) for the markets are close to “overbought” (Nasdaq is now at an “overbought” of 81.45), which is also not good, the markets continue to move higher. Until yesterday ,the market had been plodding along with small daily gains, but at the opening, the major indices gapped in an explosion of buying centered on techs and financials.
Despite the enthusiasm, I think it appropriate to caution that we are approaching the most “unfavorable season” for stocks, which begins in May. Even before I begin to explain, I can hear some saying, “Won’t this guy ever get off of the bear train?”
Yesterday’s blowout was triggered by some very strong earnings from two key market sectors. But while stocks could go higher, even much higher, we could be entering a level and cycle zone of extremely high danger where a buying climax could end with a dramatic reversal.
So the question is this: “How much higher can the market go?”
Since the Nasdaq is the most overbought of the major indices, let’s consider that index first. The next logical resistance number for Nasdaq is the May 2008 peak at 2,550, just 46 points above last night’s close. And the resistance number for the Dow is at about 11,900, and for the S&P 500 it is 1,300. There is also a 62% Fibonacci number at S&P 1,228.
I’m not saying that you should sell out everything on today’s opening. But we must all be alert to the possibility of reversals as we enter time and price zones that have caused us trouble in the past. Remember the saying, “Sell in May, and go away.” I’ll talk more about this timing strategy tomorrow.
Today’s Trading Landscape
Earnings to be reported before the opening include: Commerce Bancshares, Fairchild Semiconductor, PPG Industries and Titan Machinery.
Earnings to be reported after the close: Advanced Micro Devices, AptarGroup, Christopher & Banks, Cubist Pharmaceuticals, Google, Intuitive Surgical and People’s United Financial.
Economic reports due: Empire State Manufacturing Survey (the consensus expects 25), jobless claims (the consensus expects 440,000), Treasury International Capital (TIC), industrial production (the consensus expects 0.8% for production and 73.4% for the capacity utilization rate), Philadelphia Fed survey (the consensus expects 20), EIA natural gas report, housing market index, Fed balance sheet and money supply.
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