Despite strong earnings from Goldman Sachs (GS) and better-than-expected earnings from Johnson & Johnson (JNJ), stocks were only able to show small gains yesterday.
Before the opening, Goldman surprised even the most optimistic forecasters by reporting Q2 earnings of $4.93 per share versus analysts’ estimates of $3.54. And JNJ reported Q2 earnings of $1.15 versus an expected $1.11.
And there was positive economic news, too. The June producer price index increased 1.8%, which was twice what had been expected. And core PPI rose more than estimated with a 0.5% increase, the biggest jump since late 2008.
Technology stocks lagged, showing a gain of just 0.3%, following comments by Dell (DELL) that it expects gross margins to decrease in Q2. And CSX Corp. (CSX) reported a drop of 20% in profits, but said that there were signs of a bottom in many of its markets.
At the close, the Dow Jones Industrial Average (DJI) gained 28 points to 8,359, the S&P 500 (SPX) rose 5 points to 906, and the Nasdaq (NASD) gained 7 points to 1,800.
The NYSE traded 978 million shares with advancers ahead of decliners by 7-to-3, while 752 million shares changed hands on the Nasdaq with advancers ahead by about 3-to-2.
August crude oil fell 17 cents to $59.52 — its ninth decline in the last 10 sessions — and the Energy Select Sector SPDR (XLE) gained 61 cents, closing at $45.96.
August gold rose 30 cents to $922.80 an ounce, and the PHLX Gold/Silver Index (XAU) gained $2.63 to $134.88.
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What the Markets Are Saying
Yesterday, the long-awaited second-quarter earnings for Goldman Sachs (GS) were above even the most optimistic estimates and the PPI beat estimates, too. But instead of forging ahead with triple-digit gains, the market yawned.
The guideline on a market’s reaction to news is this: The best markets react well to bad news and the worst markets react poorly to good news. When the market yawns on good news, it is usually a sign of weakness.
Our friends at Dorsey Wright point out that their NYSE Bullish Percent topped at 74% in June, and then reversed on June 17.
“Since reversing … we’ve seen this indicator fall 52% telling us that 22% of the stocks on the NYSE have moved from Point & Figure buy signals to sell signals.”
Going a bit deeper into their method, they see banks, transportation and oil as the weakest groups. The strongest groups are computers, Internet electronics, software and semiconductors. In other words, the strongest groups fall into the technology sector.
Chartwise, yesterday’s gains were just enough to push each of the major indices to a minor resistance area.
For the Dow, it was the conjunction of the 20- and 200-day moving averages, and the upper resistance line of the current channel downtrend. For the S&P 500 and Nasdaq, it was the 20-day moving average. And each had trouble finding enough buyers to eat into the overhead of sellers.
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Perhaps, in this low-volume environment, the minor reversal up on July 8 signaled the end of the selling climax that usually follows a head-and-shoulders break.
If so, then we are now experiencing the dead-cat bounce that sucks in the bulls for the closing of the trap. To do that, the rally will probably go a bit further, perhaps even to the 50-day moving average at Dow 8,465.
It’s hard to put a micrometer on these movements because each is different, but Dorsey’s conclusions are not good news for the bulls and reinforce our opinion that the market is about to correct down, picking up volume as it achieves the targets of the often-discussed head-and-shoulders break.
Today’s Trading Landscape
Earnings to be reported include: Abbott, Acergy S.A., Adtran, Alliance Financial, AMR Corp., ASML Holdings, China-Biotics, Cintas Corp., Crown Holdings, Gannett, Kinder Morgan Energy Partners L.P., Kinder Morgan Management LLC, Landstar System, Lufkin Industries, Medtox Scientific, Polycom, Resources Global Professionals, Schawk, Stanley Furniture, Texas Industries, Universal Forest Products, Wolverine World Wide, Worthington Industries and Xilinx.
Economic reports due: June consumer price index (consensus expects +0.7%), June consumer price index excluding food and energy (consensus expects +0.1%), July Fed Empire State Manufacturing Survey (consensus expects -4), June industrial production (consensus expects -0.6%), June capacity utilization (consensus expects 67.9), July 10 U.S. Department of Energy oil inventories and Federal Reserve FOMC minutes.
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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 his most recent market outlooks.