Monday was a day of crosscurrents and even though late buying recovered some of the earlier losses, it was the first loss in five days — leaving the bulls wondering if the buying had reached its apex.
Investors’ first concern is Q1 earnings reports, which begin today with the first report traditionally from Alcoa (AA). Some analysts have openly expressed doubts, saying that the forecasts are too optimistic — especially with regard to the banks.
Respected bank analyst Mike Mayo of research firm Calyon Securities said banks are likely to face “a rolling recession by asset class.” And he was further cited by Dow Jones when he said that banks’ losses from loans on a proportional basis will surpass the Great Depression-era levels.
But others like Dick Bove of Rochdale Research, who raised his price target to $14 on Bank of America (BAC), are more optimistic. Bove said that BAC “will have the strongest competitive advantages that it has ever had.”
Treasury Secretary Tim Geithner’s comments this weekend shook the markets. By saying that the government was willing to consider removing management of financial companies that received government help, he added emphasis to the concern that the Obama administration will become even more involved in the private sector.
During the past week or so, after banks, the next-best performing sector was technology. So when The Wall Street Journal said that the IBM/Sun Micro (JAVA) deal was coming undone, the techs took it on the chin. And, as might be expected, Sun was hit hard — off more than 22% when Standard & Poor’s cut its recommendation on the stock to “sell.”
Ed Yardeni, chief investment strategist at Yardeni Research, Inc., seemed to sum up the concerns of The Street when he said, “Since the third quarter of 2007, the analysts’ consensus estimate at the beginning of each earnings season was too high compared to the actual aggregate number reported by the companies. So, it is likely that the analysts may be too high again.”
And with that, the Dow Jones Industrial Average (DJI) fell 42 points to 7,976. The S&P 500 (SPX) lost seven points at 835, and the Nasdaq (NASD) fell 15 points to close at 1,607.
The New York Stock Exchange traded 1.3 billion shares, with decliners ahead by over 2-to-1. On the Nasdaq, 712 million shares traded with decliners also ahead by more than 2-to-1.
The May crude oil contract fell $1.46 to $51.05 a barrel, down for the second session over fresh concerns about the economy. The Amex Energy SPDR (XLE) fell 93 cents to $45.09.
Gold dropped again, with the April contract down $24.10 to $871.50 an ounce because of worries that the 403 tons of gold sales by the International Monetary Fund will increase supply and depress gold prices. And the PHLX Gold/Silver Index (XAU) fell $4.29 to $123.27.
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What the Markets Are Saying
The Dow Industrials (DJI) dropped below 8,000 yesterday, but that might not be as significant as the overdone internal indicators on all of the major indices. These indicators tell us when markets are overbought or oversold based on historically relevant studies.
For example, the stochastic is now “extremely overbought.” Some would argue that it has been that way for more than a month, which is true. But it was overbought from July 2 to August 11 last year before the Dow plunged from 11,800 to 8,000, and again from Dec. 8 to Jan. 6 before the Dow again plunged — this time from 9,000 to 6,440.
And other indicators like Moving Average Convergence/Divergence (MACD), Relative Strength Index (RSI), and momentum fall into the same category of being overpriced for a four-week period. But momentum has topped and is falling — an early warning that at least a temporary market high may have already been or is in the process of being finalized.
The next support for the Dow (DJI) is at the conjunction of the 20- and 50-day moving averages at 7,556, and resistance is at the downtrend line drawn from the November to January highs and is currently at around 8,300.
Today’s Trading Landscape
Earnings to be reported include: Alcoa (AA), Bed Bath & Beyond (BBBY), Chattem (CHTT), International Speedway (ISCA), Landec Corp (LNDC), Mitcham Industries (MIND), Pier 1 Imports (PIR), Ruby Tuesday (RT) and The Mosaic Co. (MOS).
Several economic reports are due including International Council of Shopping Centers (ICSC) Chain Store Sales Index for April 4, Redbook Retail Sales Index for April 4, March Federal Reserve Federal Open Market Committee (FOMC) Minutes, February Consumer Credit (the consensus expects a $2.9 billion drop), API Oil Industry Report for April 3, and ABC/Washington Post Consumer Confidence for April 4.
Late news: The Times of London said that the IMF is expected to report the deterioration in U.S.-originated bank assets to reach $2.2 trillion by the end of next year. And it also says that total toxic debts by banks and insurers could spiral to $4 trillion.
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