by Sam Collins 03/19/08
Before Tuesday's opening, the markets took on a positive tone with the twin announcements of better-than-expected earnings from two key Wall Street investment banks, Goldman Sachs (GS) and Lehman Bros. (LEH). And even though both reported lower earnings, they preserved their reputations for exceeding expectations.
With strong earnings reports under its belt, the market was propelled forward in anticipation of a major rate cut by the Fed. So by 2:15 p.m. Eastern, the traditional time for the announcement, the Dow Industrials (DJI) were up more than 300 points. But there had been so much talk about the possibility of a 100-basis-point cut that, when the announcement of "just" a 75-point slash was made, the market hesitated and then quickly gave back about 100 Dow points in disappointment.
But by 3 p.m. Eastern, the financial sector was roaring back and, by the closing bell, the market had chalked up its best day in five years. With the rush to buy stocks and cover shorts, investors seemed to ignore the fact that the rate cut was passed by the Federal Open Market Committee with dissenting votes from two prominent governors, Dallas Fed President Richard Fisher and Philadelphia President Charles Plosser.
The accompanying statement from the board said that uncertainty about inflation has increased but that the threat may moderate in coming quarters.
This concern was further highlighted by the Producer Price Index (PPI) report, which showed a core gain of 0.4% compared with analysts' expectation of a core PPI rise of 0.2%. During the last 12 months, producer prices have risen 6.4%. If both food and energy were taken out, core prices are up 2.4%. That's the biggest year-over-year gain since October 2007 and well-above the acceptable Fed level.
However, yesterday the buyers were in charge and charge they did -- closing the major averages either at or near the highs of the day. The Dow Jones Industrial Average closed at 12,393, up 420 points, the S&P 500 (SPX) gained 54 points to close at 1,331, and the Nasdaq (NASD) added 91 points to close at 2,268.
As might be expected, volume was higher-than-usual, with the New York Stock Exchange trading 1.9 billion shares while Nasdaq traded 1.1 billion. Breadth on the NYSE was a positive 7-to-1 and on the Nasdaq, advancers outpaced decliners by 4-to-1.
April crude oil futures closed higher by $3.74 at $109.42 a barrel and the Amex Energy SPDR (XLE) gained $3.15 at $75.30. The April gold contract gained $1.70 at $1,002.60 per troy ounce, and the PHLX Gold/Silver Index (XAU) fell $7.26 to close at $192.97, which takes it midway between the 20- and 50-day moving averages. The next support for the XAU is at $190, its 50-day moving average.
What the Markets Are Saying
The combination of a Fed-sponsored takeover of major investment bank Bear Stearns (BSC), an injection of liquidity into the financial markets, and a 75-basis-point cut in interest rates led to the biggest one-day rally in four years. But even with a 420-point move in the Dow (DJI) and a 4.24% run-up for the Nasdaq (NASD), the technical equation remains unchanged.
All of the major averages are in a channel trend-down pattern. The Dow is the best performer overall, as institutions embark on a "flight to quality," driving it through the 20- and 50-day moving average. Its next challenge is the intermediate resistance line at about 12,700.
Meanwhile, the S&P 500 (SPX) closed yesterday on its 20-day moving average, and its next resistance is at the 50-day moving average now at 1,350. The Nasdaq closed on its 20-day moving average, with the next resistance at a conjunction of the 50-day moving average and the intermediate resistance line at 2,327.
On Monday, the sentiment numbers showed a huge fear factor, with the CBOE Volatility Index (VIX) at an intraday high of over 35; the American Association of Individual Investors' (AAII) numbers last week were at 59% bears and only 20% bulls.
Any catalyst was enough to make many shorts run for cover and bring out the slumbering bulls from their pens at the media networks. So, a quick bear-market rally captured the attention of Wall Street and will likely draw others into its trap.
We are again presented with an opportunity to increase our cash reserves by selling off the non-performers. As my colleague Tobin Smith says, "Watch out for another 300- to 500-point short-covering rally … remember that it won't last -- just like the rally last week didn't last." The bottom is not yet in.
Today's Trading Landscape
The following earnings will be reported: Borders Group (BGP), Cintas (CTAS), Cost Plus (CPWM), Discover Financial (DFS), General Mills (GIS) and Lindsay (LNN).
The only economic report due today is weekly mortgage applications.
Bear Stearns' investors are angry over the deal that sends their shares to JPMorgan Chase (JPM) for a paltry $2 a share and they could cause problems for the Fed and JPM by voting against the deal. Morgan Stanley (MS) reported higher-than-expected earnings for Q1 -- $145 versus an estimated $1.03.
Get Sam Collins' Daily Market Outlook e-mailed straight to your inbox each morning before the opening bell absolutely FREE!
You'll also get, in the same e-mail, his Trade of the Day, so you can start your day off right by positioning yourself for profits!
Sign up today for Sam's Daily Trader's Alert. Click here now to get this FREE daily e-mail!
QCOM is gearing up to return to its old highs.
Tech Deals Topping the Headlines
Massive overhead on the SPX, NASD may slow advances. Remain long, with emphasis on tech stocks and quality blue chips.
The response to the Fed's interest rate cut led to key reversals in the DJI and the SPX.
The response to the Fed's interest rate cut led to key reversals in the DJI and the SPX.
In the long term, CSCO could run to new highs.
