The Dow Jones Industrial Average made a new five-month high yesterday, but could not hold the gain. Although still ahead by 0.35% at the close, at one point it had been 1% higher, but a surge in the U.S. dollar caused a rush of midday selling in stocks. During the final two hours of trading, stocks made up most of their losses, but were unable to regain the lofty heights of the morning.
Thursday’s trading was directly related to the movement in the dollar. In the morning, stocks gained on a weaker dollar, and when the dollar began to firm, stocks turned south. At the close, it could be said that each of the major indices reflected an inverse move in the greenback.
McDonald’s Corp. (NYSE: MCD) rose 1.3% following Q3 earnings that beat analysts’ forecasts, and an announcement from the CEO that sales would rise between 5% and 6% in October. MCD was the second-best performer, while the leader of the Dow 30 was The Home Depot, Inc. (NYSE: HD), which rose 3.15%. United Technologies Corporation (NYSE: UTX) was third, up 1.43%.
Caterpillar Inc. (NYSE: CAT)? fell 1.1% despite a Q3 profit gain, because it cautioned that the world’s developed economies won’t grow enough next year to alleviate the high levels of unemployment. Bank of America Corporation (NYSE: BAC) was the Dow’s worst performer, off 3.3%, due to continued concerns over foreclosure practices.
In the telecommunications sector, Verizon Communications Inc. (NYSE: VZ) was off 0.4% and AT&T Inc. (NYSE: T) lost 0.9%. But Nokia Corporation (NYSE: NOK) jumped 4.2% after Q3 earnings beat analysts’ estimates.
One of the day’s big winners was eBay Inc. (NASDAQ: EBAY), up 6%, after both earnings and revenues came in above estimates. And United Parcel Service, Inc. (NYSE: UPS) fell 0.1% after projecting a slowdown in the rate of growth in package and export volume.
Jobless claims fell 23,000 week over week to 452,000, which was in line with expectations. The leading indicators for September increased 0.3% as expected.
The 10-year Treasury note fell pushing its yield to 2.55%. The U.S. dollar gained against most currencies, which is attributed to nervousness ahead of this weekend’s Group of 20 meeting. The euro fell to $1.3925.
At the close, the Dow Jones Industrial Average was up 39 points to 11,147, the S&P 500 rose 2 points to 1,180, and the Nasdaq gained 2 points at 2,460. The NYSE traded just over 1 billion shares with decliners ahead of advancers by 1.1-to-1. On the Nasdaq, 586 million shares crossed and decliners were ahead by 1.6-to-1.
Crude oil for December delivery fell $1.98 to $80.56 a barrel. The Energy Select Sector SPDR (NYSE: XLE) closed at $58.91, off 3 cents. December gold fell $18.60 to $1,325.60 an ounce, and the PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 2.31 points to 196.48.
What the Markets Are Saying
Yesterday, the Dow managed to pop to a new intraday high for the current move but couldn’t hold the gain. However, the bounce from Tuesday’s sell-off has been impressive, so the bulls remain in control. The Dow, which represents the bluest of the blue-chip stocks, has been behaving better than the other indices, indicating that institutional buyers may be at the source of its move higher.
Only the Dow has been able to challenge the bottom of the April diamond, while the broader-based indices have not yet been able to make much headway into that resistance zone. The S&P 500 has barely touched the bottom of April’s diamond, while one of the broadest-based indices of all, the NYSE Composite, even closed lower yesterday having failed to overcome the selling related to a stronger dollar.
Yesterday’s early afternoon sell-off, in response to the dollar’s rally, was just about as violent as it gets with the Dow falling almost 100 points in an hour. It took two hours to regain most of the fall, but the increase in volatility was discussed by several market analysts who took note of the fact that whipsaws like we saw on Tuesday (worst one-day drop since Aug. 31) and Thursday often occur when markets are having a difficult time punching through zones of resistance.
Our internal indicators — stochastics, Moving Average Convergence/Divergence (MACD), momentum — are still overbought, but the Relative Strength Index (RSI) of the S&P 500 has fallen from extremely overbought to just overbought.
The sentiment indicators, chiefly the Association of Individual Investors (AAII) and Investors Intelligence (II), are still overly bullish. The AAII bulls rose to 49.6%, which is not only close to the highest bullish sentiment reading for the year, but AAII notes that “this is the seventh consecutive week that bullish sentiment has been above its historical average of 39%.” That is not good.
Conclusion: While the bulls remain in control, the thick bands of resistance just above current prices, the overbought indicators, and an increase in volatility tell us that the going is getting tougher.
As long as the support zone of S&P 500 1,150 to 1,175 holds, the chances of a challenge to the April high is still possible this year. But after such a sustained rally from the August low, investors should expect a cooling-off period and a modest pullback to the breakout triple-top at S&P 1,130.
For one stock that is powering higher, see the Trade of the Day.
Today’s Trading Landscape
Earnings to be reported before the opening include: Dover, Exelon, Honeywell, IDEXX Labs, Ingersoll-Rand, KeyCorp, LM Ericsson, MB Financial, Penske Auto, Prosperity Bancshares, Schlumberger, Snap-On, Stoneridge, T. Rowe Price, Ultratech and Verizon.
There are no economic reports due today.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
