Sam Collins

Follow the Market's Footsteps

by Sam Collins   10/20/08

After four weeks of selling, it was a relief for many investors to finally have a week close with on-balance gains -- even if Friday failed to close on the plus side.

But the week had its share of both high and low moments, with lots of excitement. Not only did we see the largest single-day gain ever last Monday, but it followed up on Wednesday with the second-largest single-day point loss ever.

Friday was a typically wild day with a 72% spread between the high and low, with some of the volatility attributed to expiring options. But there was no doubt that a great deal of the buying was the result of an article in the New York Times written by Warren Buffett, in which he said that it was time to invest in stocks.

However, that news didn't seem to have much traction until an earlier report that new-home building fell to a 17-year low had run its course.

What encouraged many investors was a fall in the LIBOR rate -- the London Interbank Offered Rate, or the rate at which the world's most preferred borrowers are able to borrow money -- from 4.5025% to 4.41875% on Thursday. But other cross-currents kept prices from running away, including a Michigan/Reuters index showing that U.S. consumer sentiment fell in October.

General Motors (GM) and Chrysler were back in talks as banks and lending sources made it clear that they favored the deal. Honeywell (HON) said that Q4 earnings will be in the range of 97 cents to $1.01, and analysts indicated an estimate of $1.04 a share.

At the close, the Dow Jones Industrial Average (DJI) had fallen 127 points to 8,852, the S&P 500 (SPX) was off six points at 941 and the Nasdaq (NASD) fell six points to close at 1,711.

On the New York Stock Exchange, 1.7 billion shares traded and advancers were slightly ahead of decliners. The Nasdaq traded 1.3 billion shares and breadth there was 5-to-4 in favor of the decliners.

The week ended higher for all of the major indices, with the Dow Industrials (DJI) up 4.7%, the S&P 500 (SPX) gained 4.6% and the Nasdaq (NASD) rose 3.7%.

On Friday, the November crude oil contract rose $2 to $71.85 a barrel, and the Amex Energy SPDR (XLE) rose 99 cents to $45.94.

Gold futures fell on Friday for the seventh consecutive loss. The December gold contract fell to $787.70 per troy ounce, off $16.80, and the PHLX Gold/Silver Index (XAU) fell $2.47 and closed at $85.85.

What the Markets Are Saying

After last Monday's sharp rally, many technicians jumped to the conclusion that the bear was dead -- expunged in a wave of selling in a classic capitulation with high volume and enormous negative breadth.

Classic selling climaxes are known for all of that but also much more. What should have followed was a wave of high-volume buying, as big investors rushed after bargains. Instead, the major market indices bounced around with little conviction on either side and offered even more volatility until the close on Friday.

On Friday, options expiration provided for some action but, in the end, turned into a flattening-out process. After holding a gain for hours, the market finally sold off leaving us with a perfect little symmetrical triangle. And volume on Friday was not inspiring, either, with just 1.7 billion shares trading and a stand-off of advancers versus decliners.

The CBOE Volatility Index (VIX) made record highs, but this was not confirmed by one of my favorite indicators, the American Association of Individual Investors index, which suddenly switched to bullish from record bearish just the week before -- a very bad sign.

For now, we should keep our powder dry. Before we get knee deep in muck, let's wait for much more direction from the sentiment and internal indicators and a sense of conviction on the part of the major market players. In such a volatile environment, it is much more prudent to be a follower than a buyer.

Today's Trading Landscape

Earnings to be reported include: American Express Co (AXP), BancorpSouth (BXS), Brown & Brown (BRO), Citizens South Banking Corp (CSBC), Community Bank System (CBU), Eaton Corp (ETN), Equifax (EFX), First Defiance Financial Corp (FDEF), Flexsteel Industries (FLXS) and Forward Air Corp (FWRD).

General American Investors (GAM), Halliburton Co (HAL), Hasbro (HAS), Hexcel Corp New (HXL), HMN Financial (HMNF), Idex Corp (IEX), Liberty Property Trust (LRP), Lockheed Martin Corp (LMT), Mattel (MAT), McMoRan Exploration Co (MMR) and Meade Instruments Corp (MEAD).

Nabors Industries Ltd (NBR), Netflix (NFLX), New Oriental Education & Technology Group (EDU), Packing Corp of America (PKG), Park National (PRK), PetMed Express (PETS), Pinnacle Financial Partners (PNFP), Popular (BPOP), Riverview Bancorp (RVSB), Sandisk Corp (SNDK) and Sun Bancorp (SNBC).

Texas Instruments (TXN), Tengasco Inc. (TGC), United Fire (UFCS), Volterra Semiconductor Corp (VLTR), Wabtec Corp (WAB), Washington Trust Bancorp (WASH), Weatherford International Ltd (WFT) and Zenith National Insurance Corp. (ZNT).

The lone economic report due today is the September Conference Board of Leading Indicators.

Yahoo (YHOO) is expected to cut 1,000 jobs, and Circuit City (CC) is considering a plan to close at least 150 stores and cut thousands of jobs, according to the Wall Street Journal.

The switch from a market focus on economics to earnings is now underway and earnings surprises, good and bad, should have more influence on overall market results.

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