Stocks rallied on Friday following the release of the banks’ stress tests despite the fears that the test might reveal serious problems. And Thursday’s sloppy Treasury auction, in which rates jumped 89 ticks to 4.27%, didn’t help either.
The stress test showed that 10 of the 19 banks tested need to raise capital of almost $75 billion. But three — Wells Fargo (WFC), Citigroup (C), and Morgan Stanley (MS) — have already announced offerings. And two big banks that surprised everyone by not requiring more capital rallied sharply: They were American Express (AXP) and JPMorgan Chase (JPM). One regional bank, State Street (STT), which many analysts had placed on a list of problem banks, passed the test with a capital buffer and said that it would like to consider a repayment of TARP.
This morning we learned that BB&T (BBT) said that it will pay back its $3.1 billion TARP loan but it temporarily cut its dividend to 15 cents a quarter and will sell “at least $1.5 billion in stock to pay back the loan.” Capital One (COF) and U.S. Bancorp (USB) joined BB&T in raising cash to pay back their TARP loans.
Both stocks and treasury prices rose on Friday, but the dollar fell against the euro, which ended the week at $1.3628. The economic focus at week’s end was the employment report and that, too, helped the markets.
Non-farm payrolls came in at minus 539,000 for April against a consensus of a loss of 600,000, and the unemployment rate rose to an expected level of 8.9%. The fact that the report was cushioned by an increase of 72,000 government jobs was not the best news, since it does not favorably impact the private sector which produces wealth. But the Street was in no mood to dwell on that and the broader market focused instead on the favorable bank report.
At the close, the Dow Jones Industrial Average (DJI) was up 165 points closing at 8,575, the S&P 500 (SPX) gained 22 points at 929, and the Nasdaq (NASD) gained 23 points to close at 1,739.
For the week, the Dow gained 4.4% but is still off 2.3% for the year. The S&P 500 had a weekly gain of 5.9% and is now up 2.9% for the year, and the Nasdaq rose 4.4% for the week with an annual gain of 10.3%.
On Friday, the June crude oil contract rose $1.92 to $58.63 due to the better jobs report and a possible economic recovery. The Amex Energy SPDR (XLE) gained $2.12, closing at $51.84.
Profit-taking dropped the June gold contract to $914.90, down 60 cents, its first loss in five sessions. The PHLX Gold/Silver Index (XAU) rose $4.61 to $138.29.
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What the Markets Are Saying
Friday’s strong close leads me to believe that, despite some tired blood in the retail and technology sectors and an overbought financial sector, our indicators are telling us that the advance will most likely continue albeit at a slower pace.
In fact, our Collins-Bollinger Reversal (CBR) indicator has flashed another buy signal — the second in a week — but only on the S&P 500 (SPX). With that, the S&P 500’s next target is the narrow band of trading between 935 and 952, with the Jan. 3 closing high of 934 and intraday high of 944 as the key numbers. The S&P also broke above the first Fibonacci number of 23.6% and that should bring in some buying from the technicians.
Other numbers of importance are the 200-day simple moving average at SPX 955 and the 210-day exponential moving average at 960. These are two major numbers that often result in a reversal as the market takes a breath and consolidates its gains. Support for the S&P 500 begins at about 875.
The Nasdaq (NASD), with its emphasis on technology stocks, has already shown signs of turning away from the two major averages after intraday penetrations earlier in the week. And with the recent huge pop in financial stocks some profit taking there is likely, and that could really impact all of the major indices.
The market needs new leadership and group rotation in order to turn a bear-market rally into a new bull market. The most likely source of that leadership is energy and “hard commodities” like metals. Last week, crude oil and natural gas completed reversals as crude poked through $55 a barrel. And gold, silver and copper all appear to have turned up.
It is time to look beyond the banks and technology. Now the market must diversify or die.
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Today’s Trading Landscape
Earnings to be reported include: 4Kids Entertainment, 51JOB, Abraxas Petroleum, Advanced Battery Technologies, Alesco Financial, Alico, Allied Capital Corp, Ambac Financial Group, American Oriental Bioengineering, American States Water Co, Amicas, Amtech Systems, Ark Restaurants, Atlas Pipeline Holdings LP, Atlas Pipeline Partners, Axesstel, Banco Macro SA, Banks.com, BMP Sunstone Corp, Bowne & Co, BPZ Resources and Broadridge Financial Solutions.
Cano Petroleum, Cardium Therapeutics, Care Investment Trust, Carrizo Oil & Gas, China Fire & Security Group, China Information Security Technology, China Precision Steel, Chinacast Education Corp, Clear Channel Outdoor Holdings, Coeur d’Alene Mines, Cogdell Spencer, Collectors Universe, Compton Petroleum, Conseco, Ctrip.com Int’l Ltd, Deerfield Capital Corp, DISH Network Corp and DTS.
Echostar Corp, Emeritus Corp, Enert, Energy Conversion Devices, Energy Transfer Partners, ENGlobal, Enterprise Group Holdings LP, EV Energy Partners LP, Fluor Corp, Force Protection, Full House Resorts, Furmanite Corp, FUSHI Copperweld, FX Energy, General Steel Holdings, Gilat Satellite Networks Ltd, GLG Partners, Global Traffic Network, Gold Reserve, Gramercy Cap Corp, Great Plains Energy and GTx.
Healthcare Realty Trust, Henan Zhongpin Food Share Co Ltd, Hiland Partners
LP, Hillenbrand, Hospitality Properties Trust, Houston Wire & Cable Co, HQ
Sustainable Maritime Industries, HSBC Finance Corp, Integrated Electrical Services, Inter Parfums, International Assets Holding, iPCS, Kaman Corp, KapStone Paper and Packaging Corp, Kenexa, King Pharmaceuticals and LSB Industries.
Mariner Energy, MarkWest Energy Partners LP, Matrixx Initiatives, Maxygen, McDermott Int’l, Mediacom Communications Corp, Medivation, Mindray Medical Int’l Ltd, Molecular Insight Pharmaceuticals, Nam Tai Electronics, National Financial Partners, Neenah Paper, Nelnet, Network Equipment Technologies, Nuance Communications, ORMAT Technologies, Parkervision, Patriot Capital Funding, Peerless Manufacturing, PetMed Express, Petroleo Brasileiro S.A.-Petrobras, Physicians Formula Holdings, Pike Electric Corp, Playboy Enterprises and Priceline.com.
Quest Software, Rackspace Hosting, Regency Energy Partners LP, Reliant Energy, Resource America, Rockwell Medical Technologies, Rosetta Stone, Sanders Morris Harris Group, Silicon Motion Technology Corp, Silver Wheaton Corp, South Jersey Industries, Southern Union Co, StatoilHydro ASA, STEC, Sterling Bancorp,
Sterling Construction Co, Stifel Financial, Stonemor Partners LP and Superior
Well Services.
Tecumseh Products Co, TeleTech Holdings, The Hackett Group, The PMI Group, Tier Technologies, Toreador Resources, TravelCenters of America, Trustco Bank, United Western Bancorp, Versar, Virgin Mobile USA, Vivus, and Warner Chilcott Ltd.
No economic reports are scheduled for today.
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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.
