U.S. large-cap stocks blasted higher on Wednesday thanks almost exclusively to the 8.5% rise in International Business Machines Corp. (NYSE:IBM) after “Big Blue” reported its 22nd straight quarterly revenue decline. No, wait that’s not right. Investors looked past that to focus on better-than-expected earnings driven by a lower-than-expected tax rate and increasing success in its “strategic imperative” offerings such as AI, cloud services, and blockchain.
Taking over for legacy businesses like hardware and on-site services, this fueled a belief that IBM’s turnaround is finally gaining traction. And thus, shareholders were rewarded with the best one-day gain since 2009.
Click to EnlargeIn the end, the Dow Jones Industrial Average gained 0.7%, the S&P 500 gained 0.1%, the Nasdaq Composite gained a fraction, and the Russell 2000 gained 0.5%. Treasury bonds were weaker, the dollar declined, gold lost 0.2%, and crude oil gained 0.3%.
Breadth was mildly positive, with advancers outpacing decliners by a 1.1 to 1 ratio on relatively light volume, with NYSE activity at 89.8% of its 30-day average. Financials led the way with a 0.6% gain while energy was the laggard, down 0.7%.
LED maker Cree (NASDAQ:CREE) gained 16.4% despite issuing weak forward guidance on ongoing softness in lighting. GoPro (NASDAQ:GPRO) gained 2.6% on an upgrade from analysts at Longbow Research. On the downside, Chipotle Mexican Grill (NYSE:CMG) gained 3.4% on a downgrade from Bank of America Merrill Lynch on challenges from higher labor costs. Ulta Beauty (NASDAQ:ULTA) fell 1.9% on a downgrade from Piper Jaffray on a survey showing a drop in beauty spending by teens.
Elsewhere, President Trump threw a curveball on Twitter by announcing his opposition to the Alexander-Murray bi-partisan Obamacare fix bill after initially suggesting support for it. This suggests that insurance companies will get squeezed by the loss of federal subsidies and will likely pass the costs onto consumers via higher premiums — quickening the political pressure to reform healthcare overall.
Click to Enlarge It’s difficult to properly express just how wild this current situation is. The Dow is now at its second most overbought condition in 22 years. And the third most overbought in 62 years. The big-cap “FANG” tech stocks actually drifted lower. The CBOE Volatility Index crept off its mid-day lows.
This probably sums it up best: The relationship between “crash” risk (via the SKEW Index) vs. “normal” market volatility risk (the CBOE Volatility Index) has never been higher.
Societe Generale analysts recently noted that we have entered a “dangerous” volatility-free situation with expectations of market weakness, as derived from options pricing data, down to levels that have happened less than 2% of the time in market history.
On the 30th anniversary of the 1987 market crash, one gets the feeling that something is about to snap.
Check out Serge Berger’s Trade of the Day for Oct. 19.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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