Strong earnings from a pair of industry giants and another day down in the greenback sent stocks to a five-month high yesterday. But despite better-than-expected earnings for JPMorgan Chase & Co. (NYSE: JPM) and Intel Corporation (NASDAQ: INTC), both stocks sold off following a jump on the opening.
JPM fell because revenue and loan balances continue to be a problem, and businesses are paying off loans faster than the bank can make new ones. And Intel’s decline was due to lower forecasts for the chip sector, but other technology stocks had strong gains. Hewlett-Packard Company (NYSE: HPQ) rose 2.1%, and Microsoft Corporation (NASDAQ: MSFT) gained 2.1%.
China’s trade surplus fell to a five-month low in September, and that drove industrials and materials stocks higher: Caterpillar Inc. (NYSE: CAT) rose 1.2%, Alcoa Inc. (NYS: AA) gained 1.3%. Titanium Metals Corporation (NYSE: TIE) was up 2.6%, and The Boeing Company (NYSE: BA) gained 1.8%.
The Dow Jones Transportation Average rose 2.6% following gains in CSX Corporation (NYSE: CSX), which jumped 4.6% after a better-than-expected Q3 earnings report. Other railroad stocks rose as a result of CSX gains, including Norfolk Southern Corp. (NYSE: NSC), up 4.2%, and Union Pacific Corporation (NYSE: UNP), up 4%.
Prices fell more than expected in September with the overall price of goods imported dropping by 0.3%. The fall in prices was attributed to lower fuel prices.
The U.S. dollar fell against the euro, with the euro now at $1.3953 versus $1.3916 on Tuesday. Treasurys fell with the yield on the 10-year note rising to 2.431%.
At the close, the Dow Jones Industrial Average gained 76 points at 11,096, the S&P 500 rose 8 points at 1,178, and the Nasdaq jumped 23 points to 2,441. The NYSE traded 1.3 billion shares with advancers over decliners by over 3-to-1. The Nasdaq crossed 621 million shares, and advancers there were ahead by 2.75-to-1.
Crude oil for November delivery gained $1.34 at $83.01 a barrel. The Energy Select Sector SPDR (NYSE: XLE) closed at $59.14, up 71 cents. December gold spiked $23.80 to $1,370.50 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) hit a new closing high at 209.64, up 5.46 points.
What the Markets Are Saying
Yesterday’s broad gains take the major indices into the final resistance zone before a break to new highs for the year. The S&P 500 closed yesterday at 1,178 after slicing through the resistance at 1,150 to 1,174 like a knife through butter. Current resistance stands at 1,174 to 1,210, with the April high of 1,184 now within reach. And yesterday’s closing high on the S&P 500 also surmounted another major technical barrier at 1,173 which was the rebound high in May following the flash crash.
The psychological target of 1,200 is just 22 points away, but before we get overly enthused about an immediate breakout through 1,200 and the May highs, it might be best to review our current technical situation.
In just 32 sessions, the S&P 500 has vaulted from the August low at 1,039.7 to a high yesterday at 1,184.38 for a gain of 13.9%. During the run, it crushed the formidable 1,130 barrier that had defined the trading range for almost five months, broke through the two most important moving averages (50-day and 200-day), established an intermediate uptrend, and broke through a major bearish resistance line at 1,100. That’s the good news — and it is very good.
But now, after a record-breaking run in September, and a continuation in October, the market has by almost every technical standard reached the level of being “overbought.” Every internal indicator is at the top of its range — Moving Average Convergence/Divergence (MACD), momentum, the slow and fast stochastic, and Relative Strength Index (RSI). Each, in fact, is either at or higher than the April peak, and RSI, at 70.31, is only 4 points from the highest RSI reading in three years.
As for the sentiment numbers, Investor’s Intelligence bulls have moved up to 47.2% from 45.6% last week, and 50% is considered a “troubling figure.” April’s market top was marked by a reading of 58%. And the AAII Sentiment Survey rose to 49.03% last week. April’s high was at 48.48%.
But the trend is decidedly up with volume increasing and breadth at solid pre-breakout levels. So the question is not whether we break to new highs, but when. With our indicators now at overbought levels, it is time to be sensitive to the possibility of a moderate reversal that could take prices back to the first line of support at S&P 500 1,174, and then into the support zone at 1,153 to 1,170.
New positions should be protected with tight stops since a reversal from the current area could be quick and brutal. Maintain some cash to take advantage of a pullback since any consolidation should be viewed as a buying opportunity.
For one quick buying opportunity, see the Trade of the Day.
Today’s Trading Landscape
Earnings to be reported before the opening include: Commerce Bancshares, Fairchild Semiconductor, Landstar System, Progressive, Safeway, Winnebago Industries and WW Grainger.
Earnings to be reported after the close include: Advanced Micro Devices, Cubist Pharmaceuticals, Google, JB Hunt Transportation and Joe’s Jeans.
Economic reports due: international trade (the consensus expects -$44.3 billion), producer price index (the consensus expects 0.1%), jobless claims (the consensus expects 443,000), EIA natural gas report, EIA petroleum status report, Treasury budget (the consensus expects -$32 billion), Fed balance sheet and money supply.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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