On Friday, one stock dominated the session. Google Inc. (NASDAQ: GOOG) spiked 11% following an earnings surprise on Thursday night. But the major averages didn’t follow through, and the Dow closed lower, the S&P 500 had a small gain, and the Nasdaq, the chief beneficiary of the GOOG news, had a strong day.
Google topped Q3 estimates of $6.68 with earnings of $7.64 and was the catalyst for a broad advance in technology stocks. Apple Inc. (NASDAQ: AAPL) rose 4.1%, Adobe Systems Inc. (NASDAQ: ADBE) gained 2.2%, and Hewlett-Packard Company (NYSE: HPQ) was up 1.6%. The technology sector as a whole rose 2%.
But disappointing revenues from industrial giant General Electric Company (NYSE: GE) and another crisis in the financial sector pushed the Dow Industrials lower. GE was the Dow’s worst performer, down 5%, despite exceeding earnings estimates by several cents. Revenues missed an expected estimate of $37.54 billion and instead came in at $35.89 billion.
S&P Equity Research cut Bank of America Corporation (NYSE: BAC) to a “hold” from a “strong buy” because “it may be less prepared than peers for future mortgage-repurchase demands.” But the fall in bank stocks was no doubt due to a lack of information regarding the costs associated with the many repossessions. Botched documentation, claims from mortgage-backed securities warranties, and a host of other problems are cited in a Dow Jones report as clouding the real costs to the banks.
In other corporate news, Mattel, Inc. (NASDAQ: MAT) fell 6.5% after reporting disappointing revenues. Gannett Co., Inc. (NYSE: GCI) fell 8.8%, also as a result of a revenue shortfall. But Genuine Parts Company (NYSE: GPC) rose 4.7% after a Q3 report that profits jumped 22% and beat analysts’ earnings and revenue estimates.
In economic news, retail sales for September increased 0.6% vs. an expected increase of 0.4%, consumer prices for September increased by just 0.1% versus a consensus by economists of 0.2%, and the New York Empire Manufacturing Index for October came in at 15.73, which was significantly higher than the 5.75 that had been expected. The Treasury budget for September had a deficit of $34.5 billion versus an expected deficit of $33.5 billion.
The U.S. dollar closed higher with the euro at $1.3976, down from $1.4072 late Thursday. Treasury yields were higher with the benchmark 10-year note at a yield of 2.567.
At Friday’s close, the Dow Jones Industrial Average fell 32 points to 11,063, the S&P 500 rose 3 points to 1,176, and the Nasdaq gained 33 points to 2,469. For the week, the Dow rose 0.5%, the S&P 500 gained 0.9%, and the Nasdaq rose 2.8%.
Crude oil for November delivery fell $1.44 to $81.25 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) closed at $59.21, up 16 cents. December gold fell $5.60 to settle at $1,272 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 2.3 points to 206.06.
What the Markets Are Saying
Last week, the U.S. market chugged steadily along, confirming the uptrend with a breakout from the flash crash rebound high at S&P 1,174. But with stocks now within reach of the diamond formation, which in April signaled a top for the major indices, it is wise to review the current situation.
Resistance zones are chart locations that indicate prior selling and consist of trendlines, horizontal lines of resistance, and recognized technical formations that have historical significance. To the chartist the diamond formation, which is really just a very tight head-and-shoulders top, doesn’t usually have the long-term significance of a head-and-shoulders, but can lead to sharp declines.
The breakdown from the April 2010 diamond is especially significant since it led to a nasty five-month struggle between buyers and sellers. So as prices approach this zone, traders should be wary of a quick resolution of the potential selling that for a time could stall the uptrend.
The April diamond has a base at S&P 500 1,180 to 1,182 with a midpoint at about 1,195 and a high at 1,220. Wednesday’s intraday high ran smack into the formation as it lunged toward 1,184, and then promptly retreated.
Along with the April top and overbought indicators, there are other factors that warn us to be cautious. Mark Arbeter of Standard & Poor’s notes that while it is likely that the current rally has further to go, “we believe the probability of a pullback is rising. One of the main catalysts for strength of the markets of late has been the consistent downtrend in the U.S. Dollar Index. We think a counter-trend rally in the dollar is approaching and believe this will take away some fuel from the rally.”
See the Trade of the Day for further discussion of the dollar situation.
This leads me to the purpose of the Daily Market Outlook. In our daily discussion of the markets, I have often said that the Daily Market Outlook can be invaluable in that it is not meant to be predictive of market action, but to enable readers to be “responsive” to what the market is telling you. And what I mean is that if an investor can become familiar with the tools of technical analysis, he or she will become attuned to the repetitive patterns that often precede price movement. For those who are willing to put in the time and effort and apply the lessons with great patience, the analysis can be very rewarding.
There are two books that are must reading for a student of the market: “The Technical Analysis of Stock Trends” by Edwards and Magee, and “Technical Analysis Explained” by Martin J. Pring. And for those who wish to delve into the world of futures, I recommend “Technical Analysis of the Futures Markets” by John J. Murphy.
As to my goal for the Daily Market Outlook, I am reminded of the Chinese proverb: Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.
Today’s Trading Landscape
Earnings to be reported before the opening include: Citigroup, Halliburton, Hasbro, McMoRan Exploration, New Oriental Education & Technology and PetMed Express.
Earnings to be reported after the close include: Apple, Brown & Brown, Crown Holdings, Equity Lifestyle Properties, IBM, ICU Medical, IDEX Corp., Infinera, Lincare, Packaging Corp, RLI Corp., Steel Dynamics, VMware, Werner Enterprises and Zions Bancorp.
Economic reports due: Treasury International Capital, industrial production (the consensus expects 0.2%, and 74.8% for capacity utilization rate), and Housing Market Index.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
