Sam Collins

Get Ready for a Leg Up

by Sam Collins   10/30/08

After Tuesday's surge -- the second-biggest point advance for the Dow Industrials (DJI) on record -- most traders were prepared for the normal round of profit-taking as soon as Wednesday's opening bell sounded.

There was some light selling but then stocks rallied and held their gains until just after 2 p.m. Eastern, when sellers responded to the Fed's 0.5% rate cut. Thirty minutes later, prices had fallen several hundred points but bargain hunters emerged and another rally thrust the index from the low of the day at Dow 8,930 to the high at 9,363 in just an hour and that's where it stood at 3:50 p.m. Eastern.

But the day wasn't over yet.

Just as brokers were cleaning things up for the ride home, a massive sell program hit the exchanges and in less than 10 minutes the hard-fought gains of the day vanished. When the smoke cleared, the Dow Industrials (DJI) were down more than 74 points from Tuesday's close and the S&P 500 (SPX) had lost more than 1%.

The list of earnings reports included Kraft (KFT), which reported earnings in line with estimates, and Procter and Gamble (PG) who beat Q1 estimates by 4 cents. General Motors (GM) and Chrysler tentatively agreed on a merger and GM rose 8.2%.

Energy shares rallied in line with a gain in crude, while consumer and discretionary stocks led the early advance and telecommunications led the decline.

At the close, the Dow Jones Industrial Average (DJI) fell 74 points to 8,991, the S&P 500 (SPX) was off 10 points to 930 and the Nasdaq (NASD) gained 8 points, closing at 1,657.

The New York Stock Exchange traded just over 1.7 billion shares, with advancers ahead by 2-to-1. On the Nasdaq, 1.2 billion shares crossed with advancers there ahead by 4-to-3.

Crude oil for December delivery rose $4.77 to $67.50 a barrel, and the Amex Energy SPDR (XLE) rose $1.04 to $448.13.

The December gold contract rose $13.50 to $755 per troy ounce, and the PHLX Gold/Silver Index (XAU) gained $7.79 to close at $80.51.

What the Markets Are Saying

During most of Wednesday, stocks were strong as buyers pushed ahead, moving the Dow (DJI) and S&P 500 (SPX) toward the key breakout numbers at Dow 9,300 and S&P 985.

But just as the Dow surmounted its goal, huge block orders hit the trading floors as programmed sellers launched the fourth attack from almost the exact levels as on Oct. 17, Oct. 20, and Oct. 21. But when sellers are so precisely positioned, it usually isn't long before the supply of stocks gives way and buyers pocket their bargains.

For the near-term, the technical condition of the market is stronger than at any time in the past two months. The major averages have held the critical lows made on Oct. 10, and two massive rallies catapulted stocks from that low point -- and just above yesterday's highs, there is little resistance until 1,100 on the S&P 500.

Jeff Weiss, the respected Chief Technical Analyst of Jessup and Lamont, brought the attention of CNBC watchers to an interesting technical condition that has only occurred twice since January 1987, and on both occasions it signaled a major market low.

The indicator that Jeff talked about was the downside volume as a percent of total NYSE volume on a 25-day basis. The number was 64% and was recorded on both Friday and Monday -- and at the low in 2002. It signifies a capitulation and indicates that at least a strong trading rally should result.

Jeff's work and mine is quite different but I have come to the same conclusion that we will soon have a tradable rally -- perhaps even today. It's all coming together as the bow is now taut and, unless something outside of the normal market action stifles the markets, a strong tradable rally is about to occur.

Bottom line: Breakouts from Dow 9,300 and S&P 985 are about to occur. Target: Dow 10,500 and S&P 1,100.

Today's Trading Landscape

Earnings to be reported include: 3PAR (PAR), 8x8 (EGHT), Advanta Corp (ADVNB), Advantest Corp (ATE), Affiliated Computer Services (ACS), AGL Resources (ATG), Airvana (AIRV), Akamai Technologies (AKAM), Alaska Communications Systems Group (ALSK), Alcatel-Lucent (ALU), Alexandria Real Estate (ARE), Alliant Techsystems (ATK), AmeriSourceBergen (ABC), AMN Healthcare Services (AHS), Anglogold Ashanti Ltd (AU), Apache Corp (APA), APCapital (ACAP), Applied Micro Circuits Corp (AMCC), Armstrong World Industries (AWI), Asbury Automotive Group (ABG), Assurant (AIZ), AstraZeneca plc (AZN), AuthenTec (AUTH), Aventine Renewable Energy (AVR) and Avon Products (AVP).

B&G Foods (BGS), Baldwin Technology (BLD), Ball Corp (BLL), Ballantyne Omaha (BTN), Bare Escentuals (BARE), Barrick Gold (ABX), BJ Services Co (BJS), BlueLinx Holdings (BXC), BMC Software (BMC), British American Tobacco (BTI), Brookfield Homes Corp (BHS) and Brush Engineered Materials (BW).

Cabela's (CAB), CAI Int'l (CAP), California Micro Devices Corp (CAMD), Callaway Golf (ELY), Camden Property Trust (CPT), Cameron (CAM), Carbo Ceramics (CRR), CardioNet (BEAT), CBS Corp (CBS), CDI Corp (CDI), Chartered Semiconductor Manufacturing (CHRT), Chemtura Corp (CEM), Chesapeake Energy Corp (CHK), Chiquita Brands Int'l (CQB), Chunghwa Telecom Co Ltd (CHT), Cigna (CI), Cincinnati Bell (CBB), Colgate-Palmolive (CL), Colonial Properties Trust (CLP), Comfort Systems USA (FIX), Commercial Metals Co (CMC), CommScope (CTV), CompX Int'l (CIX), Conexant Systems (CNXT), CryoLife (CRY), CTC Media (CTCM) and CVS Caremark Corp (CVS).

D&B (DNB), Depomed (DEPO), Deutsche Bank (DB), Diebold (DBD), Digi Int'l (DGII), Distribucion y Servicio D&S SA (DYS), DIVX (DIVX), Dollar Financial Corp (DLLR), Dominion Resources (D), Dover Downs Gaming and Entertainment (DDE), Dover Motorsports (DVD), Drew Industries (DW), DSP Group (DSPG) and Duke Realty Corp (DRE).

Eastman Kodak Co (EK), eHealth (EHTH), Electronic Arts (ERTS), Enbridge Energy Management (EEQ), Enbridge Energy Partners LP (EEP), Energizer (ENR), EnPro Industries (NPO), Essex Property Trust (ESS), Exar (EXAR), Expedia (EXPE), ExxonMobil Corp (XOM), Federal Signal (FSS), First Community Bancshares (FCBC), Flagstar Bancorp (FBC), Flotek Industries (FTK), Fording Canadian Coal Trust (FDG), Freescale Semiconductor (FSL), FreightCar America (RAIL), Fujifilm Holdings Corp (FUJI) and Furniture Brands (FBN).

Gartner (IT), Genesis Lease Ltd (GLS), Gen-Probe (GPRO), Gentiva Health Services (GTIV), Halifax (HX), Harsco Corp (HSC), Hearst-Argyle Television (HTV), Hitachi Ltd (HIT), HLTH Corp (HLTH), Huttig Building Products (HBP) and Hypercom Corp (HYC).

Idearc (IAR), Idenix Pharmaceuticals (IDIX), iLinc Communications (ILC), ILOG (ILOG), Imperial Oil Ltd (IMO), IntercontinentalExchange (ICE), Intermec (IN), International Flavors & Fragrances (IFF), International Game Technology (IGT), International Paper Co (IP), Investment Technology Group (ITG), Iron Mountain (IRM) and Isilon Systems (ISLN).

Jarden Corp (JAH), Kaman Corp (KAMN), Kindred Healthcare (KND), KLA-Tencor (KLAC), KT Corp (KTC), Kyocera Corp (KYO), LaBarge (LB), Lear Corp (LEZ), Libbey (LBY), Liberty Media Corp (LCAPA), LIN TV Corp (TVL) and Lubrizol (LZ).

Mac-Gray Corp (TUC), Mack-Cali Realty Corp (CLI), Mahanagar Telephone Nigam Ltd (MTE), Marathon Oil Corp (MRO), Massey Energy Co (MEE), McAfee (MFE), Midas (MDS), Millipore Corp (MIL), Modine Manufacturing Co (MOD), Monster Worldwide (MNST), Moog (MOG-A), Morningstar (MORN), Motorola (MOT), MPS Group (MPS) and Mylan (MYL).

Navarre (NAVR), Navigant Consulting (NCI), Newell Rubbermaid (NWL), NewMarket Corp (NEU), Newpark Resources (NR), NorthWestern Corp (NWE), Novamed (NOVA), Novo Nordisk A/S (NVO), NRG Energy (NRG), Oceaneering Int'l (OII), Odyssey Re Holdings Corp (ORH), Olympic Steel (ZEUS), Omnicare (OCR), OSG America L.P. (OSP), OSI Systems (OSIS) and Otter Tail Power (OTTR).

Penske Automotive Group (PAG), PharMerica Corp (PMC), Portland General Electric Co (POR), Pride Int'l (PDE), PS Business Parks (PSB), Psychiatric Solutions (PSYS), Quest Software (QSFT) and Quixote (QUIX).

Ruddick Corp (RDK), Scana Corp (SCG), Seaspan Corp (SSW), Shaw Group (SGR), Silicon Motion Technology Corp (SIMO), Simpson Manufacturing (SSD), Southwestern Energy (SWN), Span-America Medical Systems (SPAN), Standard Pacific Corp (SPF), Stantec (STN), StarTek (SRT), Steris (STE), Sterling Bancorp (STL), Sun Healthcare Group (SUNH), Sun Microsystems (JAVA) and Superior Energy Services (SPN).

Taiwan Semiconductor Manufacturing Co Ltd (TSM), TECO Energy (TE), The Brinks Co (BCO), The Laclede Group (LG), The Timberland Co (TBL), Tomkins plc (TKS), Transalta Corp (TAC) and TRW Auto (TRW).

U.S. Auto Parts Network (PRTS), Unifi (UFI), Unilever plc (UL), Unisys (UIS), Universal American (UAM), Unum Group (UNM), Varian Semiconductor Equipment Associates (VSEA), Vectren Corp (VVC), Visteon Corp (VC), Waste Management (WMI), WebMD Health (WBMD), Weingarten Realty Investors (WRI) and Wyndham Worldwide (WYN).

The following economic reports are due today: initial jobless claims for the week of Oct. 25 (the consensus expects negative 3,000), third-quarter advance GDP (the consensus expects negative 0.5%) and the DJ-BTMU Business Barometer for Oct. 13.

Rate cuts in Asia lifted stocks there, with Hong Kong up 12% and Tokyo up 10%.

In terms of earnings, Avon (AVN) reported 41 cents versus an estimated 50 cents, Eastman Kodak (EK) saw 35 cents versus an expected 28 cents and CBS Corp. (CBS) reported 43 cents versus an estimated 40 cents.

And on a personal note, I'd like to say thank you, Phillies -- it's been a great year!

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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.