A broader intraday rally on Friday failed to overcome a sharply lower opening that drove the Dow Industrials (DJI) to the lowest level since Nov. 20.
The opening sell-off resulted from disappointing earnings by General Electric (GE) and others, and showed investors the inability of even the most stable companies to overcome the financial crisis that has held the market captive for more than a year.
Even though GE met its Q4 estimates by reporting 37 cents and the management emphasized its intention to maintain its dividend, there were many who were skeptical of the company’s ability to do so indefinitely.
And there were other earnings disappointments from companies that have long histories of continuous growth, such as Harley Davidson (HOG) and Schlumberger (SLB), both of which came in short of analysts’ expectations.
But the real culprit of the decline is still the financial sector, as “cheap” got even cheaper and household names, like Bank of America (BAC) and Wells Fargo (WFC), hit new lows. As the crest of the earnings season approaches, investors are nervously combing the financial reports for any hope of a recovery this year. So far, there has been little in the way of encouragement coming from corporate America.
On Friday, the Dow (DJI) closed lower by 45 points at 8,078, the S&P 500 (SPX) rose four points to 832, and the Nasdaq (NASD) gained 12 points, closing at 1,477.
The New York Stock Exchange traded 1.4 billion shares, with advancers slightly ahead of decliners. The Nasdaq crossed 897 million shares, with decliners slightly ahead.
The March crude oil contract rose $2.80 to $46.47 a barrel, and the Amex Energy SPDR (XLE) gained $1.33 with a close at $47.06.
Investors continued to escape to gold. The February gold futures rose $37 to $895.80 an ounce, and the PHLX Gold/Silver Index (XAU) gained $10.38, closing at $125.94. This puts the index at triple, and a break higher would likely move prices to the next level of resistance at $140, which is its 200-day moving average line.
The shortened week of trading produced the following results: The Dow (DJI) fell 2.5%, the S&P 500 (SPX) was off 2.1% and the Nasdaq (NASD) lost 3.4%. For the year, the Dow is down 8.0%, the S&P is off 7.9% and the Nasdaq is down 6.3%.
What the Markets Are Saying
The major indices continue to test their November lows, with the Dow (DJI) making an intraday penetration that — had it stuck — would no doubt have led to an immediate test of the bear-market lows. But, again, the markets held above the fragile support line at Dow 8,000 and the S&P 500’s support zone at 800-820.
How long this support will hold is anybody’s guess, but Friday’s reversal from a crushing opening was impressive despite its lack of convincing volume.
With all of our internal indicators grossly oversold and sentiment clearly bearish, the market should rally from its current support. For that reason, traders should grab their favorite long 2x Exchange-Traded Fund (ETF) and, despite the risk, go for a trade that could result in a profit from a 400- to 500-point advance in the Dow.
(2x ETFs target two-times the daily return of its underlying index. Check out the Trade of the Day for a spotlight on a 2x ETF.)
However, the market does not always accommodate our most ardent wish, so despite the likelihood of a rally, traders must set stop-loss orders under last week’s lows or take an enormous risk of loss.
A daily close under the intraday lows of last week would most certainly lead to a test of the November low and could even lead to a general market rout. So, be careful out there and only risk what you can afford to lose.
Today’s Trading Landscape
Earnings of note to be reported: Albemarle Corp (ALB), American Express (AXP), Amgen (AMGN), Applied Industrial Technologies (AIT), Buckeye Technologies (BKI), Caterpillar (CAT), Covidien Ltd (COV), Crane (CR) and Danaher (DHR).
Eaton (ETN), F.N.B. Corp (FNB), Freeport-McMoRan Copper & Gold (FCX), Graco (GGG), Haliburton (HAL), HF Financial (HF), Kimberly Clark (KMB), McDonald’s Corp (MCD) and McKesson Corp (MCK).
Netflix (NFLX), NuStar Energy L.P. (NS), Old National Bancorp (ONB), Olin Corp (OLN), Pactiv (PTV), Parexel (PRXL), QLogic (QLGC), Quest Diagnostics (DGX), Reinsurance Group of America (RGA), Sealed Air (SEE), Sierra Bancorp (BSRR), Silicom Ltd (SILC), SL Green Realty (SLG) and Steel Dynamics (STLD).
Texas Instruments (TXN), Tyson Foods (TYS), Virtual Radiologic Corp (VRAD), VMware (VMW), Volterra Semiconductor Corp (VLTR), W.W. Grainger (GWW), Weatherford Int’l (WFX) and Zoran Corp (ZRAN).
The following economic reports are due: December Existing Home Sales, January Conference Board Leading Indicators, and January Dallas Fed Mfg Production Index.
Pfizer (PFE) will buy Wyeth (WYE) for $33 a share cash plus .985 shares of PFE for each share of WYE.
Get Sam Collins’ Daily Trader’s Alert e-mailed straight to your inbox each morning before the opening bell absolutely FREE!
In addition to getting instant access to his Daily Market Outlook, you’ll also receive, in the same e-mail, his Trade of the Day so you can start your day off right by positioning yourself for profits!
Click here today to sign up today for Sam’s FREE Daily Trader’s Alert!
Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
