by Sam Collins 08/21/08
Volume was light but volatility was high as a late rally Wednesday closed stocks on the upside -- led by the financial group. Throughout the session, financials were the most volatile, down 1.6% by 10 a.m. Eastern, then up 1.8% just an hour later and falling and rising again by the same amounts in the afternoon.
Speculation about the future of Freddie Mac (FRE) and Fannie Mae (FNM) had much to do with the volatility. Even though there was no specific news to cause the wide swings in the two quasi-government mortgage giants, a Wall Street Journal article said that representatives from the two companies will meet with Treasury officials to explore whether the Treasury could "clarify its intentions."
The price of crude oil was higher. With that, the energy stocks posted strong gains. Valero Energy (VLO) gained 4.3%, Apache Corp. (APA) was up 3.9%, and Chevron (CVX) gained more than 2%.
Hewlett-Packard (HPQ) rose 2.51% on a strong Q2 report., but Novatel Wireless (NVTL) fell 25% after earnings fell short of expectations.
At the close, the Dow Jones Industrial Average (DJI) was up 69 points at 11,417. The S&P 500 (SPX) rose eight points at 1,275 and the Nasdaq (NASD) gained five points at 2,389.
The NYSE traded just 1 billion shares and the Nasdaq did 710 million. On both exchanges, advancers were slightly ahead of decliners.
Crude oil for September delivery rose 45 cents to $114.98 and the Amex Energy SPDR (XLE) rose $2.09 to $74.50.
The December gold contract fell 50 cents to $816.30, and the PHLX Gold/Silver Index (XAU) gained $2.64 to close at $145.35.
What the Markets Are Saying
With crude oil now at what appears to be major support at $110 to $115 a barrel, and the Nasdaq (NASD) and the small- and mid-cap stocks at the top of their ranges, it seems only a matter of time before the stock market rolls over to challenge the July lows.
Even though the S&P 500 (SPX) closed higher Wednesday, it still fell below the 20-day moving average and penetrated the short-term bullish support line on Monday, and again intra-day yesterday. Momentum is falling sharply and the stochastic in every major index is moving rapidly lower following Monday's and Tuesday's sell-offs.
The Nasdaq has led the market higher since mid-July and now will likely lead it lower. After a dramatic failure to hold above the 200-day moving average, several internal indicators flashed sell signals and it is likely that those signals will result in at least a test of the July 28 low at 2,559 -- and could even drive the Nasdaq to a test of the July 15 reversal low under 2,200.
Traders might want to explore the contra-Exchange-Traded Funds (ETFs) instead of outright shorting of stocks. Some positions could be taken in commodity-based equities including energy and precious metals. The defense is on the field again.
Today's Trading Landscape
Earnings to be reported include: Barnes and Noble (BKS), Bebe Stores (BEBE), Blue Coat Systems (BCSI), Bon-Ton Stores (BONT), Burger King (BKC), Callwave (CALL), Casual Male Retail Group (CMRG), Cost Plus (CPWM) and Cyberonics (CYBX).
Dick's Sporting Goods (DKS), Ditech Networks (DITC), Drdgold Ltd (DROOY), DryShips (DRYS), First Marblehead Corp (FMD), Foot Locker (FL), Frontline Ltd (FTO), Gamestop Corp (GME) and Gap (GPS).
Hibbett Sports (HIBB), Hormel Foods Corp (HRL), Intuit (INTU), Kensey Nash Corp (KNSY), Lancaster Colony Corp (LANC), Met-Pro (MPR), Noah Education Holding Ltd (NED), Nordson (NDSN), Pacific Sunwear of California (PSUN), Patterson Dental (PDCO) and Peoples Educational Holdings (PEDH).
QAD Inc. (QADI), ScanSource (SCSC), School Specialty (SCHS), Ship Finance Int'l Ltd (SFL), Shoe Carnival (SCVL), ShoreTel (SHOR), Stage Stores (SSI), Stein Mart (SMRT), Tech Data Corp (TECD), The Buckle (BKE), The Cato Corp (CTR), Toro (TTC), Verigy Ltd (VRGY) and Zumiez (ZUMZ).
The following economic reports due: initial jobless claims for the week of Aug. 16 (the consensus expects a 5,000 decline), the August Philadelphia Fed Business Index (the consensus expects negative 13.5), July Conference Board Leading Indicators (the consensus expects negative 0.2%) and the DJ-BTMU Business Barometer for Aug. 2.
In Europe this morning, the dollar is down and gold is up. Domestic markets look to open lower on more financial concerns -- especially about Lehman Bros. (LEH). Burger King (BKC) reported Q2 earnings of 37 cents versus an estimated 34 cents.
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FAST is now consolidating and recently flashed a buy signal from our internal indicator.
Options Expiration Adds Volatility
The opening looks to be higher but today is options expiration day, and anything could happen.
Chances are high stocks will sell off further, but be alert for a dead-cat bounce after such a dramatic breakdown.
Traders and longer-term investors should sell any new positions at the first opportunity and short ETFs on a temporary recovery in the market.
CAT, the blue-chip of its industry, is the first to attract attention when it's time to dress up a portfolio.
