This week has the potential to be the best week of the year for stocks, following their worst week of the year. Now that’s some back-to-back performance, but it should not give investors a feeling of confidence in such volatile markets.
Tuesday’s buying resulted from a continuation of better earnings and a surge by the euro. Investors moved into higher-risk investments like small-cap stocks and commodities as the euro closed over $1.27.
Alcoa Inc. (NYSE: AA) rose fractionally following better-than-expected earnings and revenues for Q2. And Dow component Chevron Corporation (NYSE: CVX) gained following a statement that it expects better earnings to continue. Of the 30 Dow stocks, 29 rose yesterday with Intel Corporation (NASDAQ: INTC) leading the list and gaining 9.29%. Both Caterpillar Inc. (NYSE: CAT) and Hewlett-Packard Company (NYSE: HPQ) were up more than 4%.
Stocks rose despite a Commerce Department report that the U.S. trade deficit widened in May to its highest level of the year. And another possible negative—Moody’s cut of Portugal’s debt rating by two notches—was also overshadowed by earnings reports.
All 10 major sectors rose with financials showing the best gains, up 2.6%. And American International Group, Inc. (NYSE: AIG) rose 6.8% on news that its biggest private shareholder increased his stake in the company.
The yield on the 10-year Treasury note fell to 3.114%.
At the close, the Dow Jones Industrial Average had gained 147 points at 10,363, the S&P 500 rose 17 to 1,095, and the Nasdaq gained 44 points to 2,243.
The NYSE traded 1.1 billion shares with advancers over decliners by almost 6-to-1. The Nasdaq crossed 682 million shares with decliners ahead by 5-to-1.
Crude oil for August delivery rose $2.20 to settle at $77.15 a barrel. The Energy Select Sector SPDR (NYSE: XLE) gained 63 cents to close at $53.11. August gold gained $14.80 to $1,213.50 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) rose 0.3 points to 174.03.
What the Markets Are Saying
Did someone say that market volatility was declining? The CBOE Volatility Index (VIX) may have fallen to 24.41 yesterday from 38.57, but that didn’t stop the Dow Industrials from rising 793 points in seven days following a decline of 1,013 points in nine days. Nor could the Wall Street Journal contain its enthusiasm with the headline, “Blue Chips Rally 146.75, a 6-Day Gain; Up 6% in July.”
In just days they’ve forgotten the July 2 headline, “Dow’s Losing Streak Hits Seven.” And the follow-up: “The benchmark tumbled 4.5% for the week, its worst weekly percentage drop since the week of the May 6 ‘flash crash’ … The weekly percentage drop also represented the worst performance for any week leading up to the July 4th weekend since 1896. The S&P 500 and the Nasdaq put in similarly bleak performances.”
A long-time professional investor and friend opined yesterday, “You know, this is EXACTLY my problem with the volatility. Not that we are volatile (although that is a problem) but we race up and down and through critical points in days, whereas these movements used to take months. I just moved out and we are up 15% and ready to start a new bull market. Gee whiz, do I get back in? Then if I do, we’ll drop 15%.”
Yes, it is precisely this type of volatility that drives investors out of the market. And that’s too bad because the wide swings are often the result of the irrational and emotional responses of hedge funds and traders who control the low volume, highly volatile environment created by a lack of public participation. And after several days like this, public participation may dwindle even more with an equal increase in volatility. In other words, the swings aren’t going to go away and could even become worse.
What’s an investor or trader to do in such an environment? Stick with a plan. If you are bearish, remain bearish until proven otherwise. With yesterday’s close the resistance barriers are now directly in front of us. Both the Dow and the S&P 500 are within their zones of resistance with the Dow closing at 10,363, its 50-day moving average at 10,272, the 200-day at 10,370, and the bearish resistance line at yesterday’s high of 10,408.
Similarly the S&P 500 closed at 1,095 with its 50-day moving average at 1,092, the 200-day at 1,112, and its bearish resistance line at 1,104.
Consider the following: Yesterday’s volume was again very light. And within the final two minutes of trading, the Dow fell 44 points from its high of the day, while the S&P 500 gave back more than 4 points. The S&P 500 is at the support zone after the April peak and 17 under its 200-day moving average—both are significant barriers. And if that doesn’t get your attention, consider this: The 2009 close at 1,115 and the 50% retracement of the market crash at 1,121 are barriers, as well.
Will strong Q2 earnings be enough to break through these barriers? ), Google Inc. (NASDAQ: GOOG), JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C) and Bank of America Corporation (NYSE: BAC) have yet to report. By week’s end we should know if the bear is still in charge or of the bull has reversed the field upward.
This may be no market for the faint of heart, but for the bears, now is the time to enter short sales. As for investors tired of the swings, selling now may the solution to their recent frustrations.
Today’s Trading Landscape
Earnings to be reported before the opening include: iGate, Jackson Hewitt, Progressive and Texas Industries.
Earnings to be reported after the close include: Landstar System and Marriott.
Economic reports due: Bank Reserve Settlement, MBA purchase applications, retail sales (the consensus expects -0.2%, ex-autos 0%), import and export prices, business inventories (the consensus expects -0.2%), EIA petroleum status report and FOMC minutes.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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John Lansing, trading maverick who called the market turn in March 2009, last summer’s “rebound rally,” gold’s meteoric rise and a continued “bull run” earlier this year, now sees huge trouble ahead, and then a surprising rally that will take the Dow back to new all-time highs. Here’s why — plus how to double your money as the market plunges and then soars.
