Sam Collins

Don't Jump the Gun

by Sam Collins   03/25/08

There was a lot of good news for stocks Monday and the bulls jumped on it -- driving the Dow Industrials (DJI) to another triple-digit gain.

During the long weekend, new pressures by stockholders of Bear Stearns (BSC) on acquirer JPMorgan Chase (JPM) resulted in a renewed bid of $10 a share for the ailing investment bank. As a result, BSC closed the day at $11.25, up $5.29.

The increased price of the deal impacted the rest of the financial stocks, driving Citigroup (C) to $23.27, up 3.4%, and the Dow blue-chip financials higher, too. American Express (AXP) gained 3.11%, Bank of America (BAC) was up 1.41%, American International Group (AIG) gained 2.44%, and even JPMorgan (JPM) rose by 1.26%.

Good news on existing home sales also had a positive effect. Most economists predicted a seasonally adjusted annualized rate of 4.85 million and, instead, the National Association of Realtors reported re-sales of 5.03 million, up 2.9% from January.

Inventories of unsold homes fell 3% to 4.03 million, which is a 9.6-month supply. The better-than-expected numbers resulted in heavy buying in homebuilders (up 6.5%) and real estate management and development groups (up 13.5%).

However, just before the close, the financial stocks slipped on profit-taking and ended the day at just 0.7% up versus the intraday high of more than 3.4%. Despite the profit-taking, the Dow Jones Industrials (DJI) rose by 187 points to 12,549, the S&P 500 (SPX) gained 20 points, closing at 1,350, and the Nasdaq (NASD) took the honors by adding 69 points, closing at 2,327, up 3.04%.

Volume on the New York Stock Exchange totaled 1.6 billion shares and just over 1 billion shares traded on the Nasdaq (NASD). Breadth on both exchanges was positive, with the NYSE at just over 4-to-1 and the Nasdaq (NASD) at 3-to-1.

May crude oil futures gained 98 cents to close at $100.86 a barrel, and the Amex Energy SPDR (XLE) gained $1.24 to close at $72.05. April gold futures gave up their early gains, closing at $918.70 an ounce, down $1.30, and the PHLX Gold/Silver Index (XAU) fell 82 cents to $171.19.

The XAU is now hovering just above the 200-day moving average -- holding at just above there on both Thursday and yesterday. The internal indicators are grossly oversold, so the probability of a reaction rally in both futures and the XAU is strong.

What the Markets Are Saying

The bulls are excited, and no wonder: The financial sector, as measured by the Financial Sector SPDR (XLF), rose from an intraday low of $22.29 last Monday to an intraday high yesterday of $27.37 (up 22.8%).

The net gain on the closes of those days isn't quite so impressive (up 13.7%) but that's still a solid gain. The XLF closed at $26.66, just below its channel down resistance line at $27, and selling was heavy in the last 30 minutes of the day.

There is no doubt that yesterday, especially the morning, brought a run of short-covering that drove the financials higher, and when the panic-covering abated, the group sagged. But even after this big run, the Financial Sector SPDR (XLF) is still in a bear market.

Standard & Poor's pointed out after the close that the XLF has, from the high in June to the intraday low of last Monday, retraced almost the entire bull market in the financial sector that took nearly five years to reach. The firm said that advances above last night's close will be harder to achieve since, "There is a thick line of resistance between 26 and 30."

I agree and would also point out that there was a similar run on the financials in January when they ran from a low of $24.11 on Jan. 22 to a high of $29.93 on Jan. 31 for a gain of more than 24%. Following that run, there were a host of pundits saying that "the bottom is in" but it wasn't, and the high of that move only served to establish another high point of the bearish resistance line that is still intact.

The financial stocks and the overall stock market are still in a very clearly defined major bear market. Last week's rally was just that -- a sharp rebound in a downtrend. The market will tell us when the bottom has been made, so don't jump the gun and take the chance of a misfire.

Today's Trading Landscape

Earnings to be reported today include: Commercial Metals (CMC), Comstock Homebuilding (CHCI), Fortress Investment Group (FIG), Jabil Circuit (JBL), Kirkland's (KIRK) and SAIC (SAI).

Economic reports due are January's S&P/Case-Shiller Home Price index, March Consumer Confidence (the consensus expects 73.5) and the Richmond Fed Manufacturing survey (the consensus expects -5).

Merrill Lynch (MER) downgraded a number of banks yesterday including PNC Financial (PNC), Capital One (COF), SunTrust (STI) and Bank of America (BAC), so the financial sector may have some selling pressure today. The stock market continues to be driven by events and the most important economic release today is the March Consumer Confidence number at 10 a.m. Eastern.

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