Sam Collins

Oil's Slip Could Boost Stocks

by Sam Collins   07/24/08

It was the same tune but a different verse that brought modest buying into the stock market yesterday.

Crude oil prices fell again as a result of data that showed inventories were not down as much as anticipated, and a possible hurricane in the Gulf was avoided. Another factor may also be creating the overage in inventory: The price of gasoline may be finally impacting the amount of driving this summer.

The financial sector again attracted buying on news that Congress reached a deal for a housing bill that will provide financial aid to Fannie Mae (FNM) and Freddie Mac (FRE) on a needs basis. But some of the early gains in financials were taken back by concerns that Washington Mutual (WM) will have to raise more capital. WM fell more than 20% after reporting that it lost $3.3 billion in Q2.

In other corporate news, Costco Wholesale (COST) fell almost 12% after warning that its August-ending quarter would miss analysts' estimates. Pfizer (PFE) gained after reporting that its Q2 profit more than doubled. Boeing (BA) fell 3.7% after missing estimates of $1.28 a share – the large aerospace company reported $1.16.

McDonald's Corp. (MCD) also fell 0.8% although besting estimates of 86 cents and reporting $1.04. McDonald's said that despite the strong demand for its products worldwide it sees an increase in the cost of beef of up to 9% by year's end.

The Fed's Beige Book showed that rising energy and commodity prices pose a problem for the economy at just the time growth is lagging due to a housing downturn. The report said that "the pace of economic activity slowed somewhat" since mid-June and consumer spending was "sluggish." All 12 of the Fed's districts reported that prices are "elevated or increasing."

The Dow Jones Industrial Average (DJI) gained 30 points, closing at 11,632, the S&P 500 (SPX) gained five points at 1,282 and the Nasdaq (NASD) rose 22 points to close at 2,326.

Volume was heavy with the NYSE trading 1.7 billion shares, with gainers ahead by 8-to-5. On the Nasdaq (NASD), almost 1.1 billion shares crossed and the breadth there was a positive 4-to-3.

September crude oil prices fell $3.98 and settled at $124.44 a barrel; the Amex Energy SPDR (XLE) fell $2.78 and closed at $73.79.

The August gold contract dropped $25.70 to $922.80 per troy ounce. The PHLX Gold/Silver Index (XAU) fell $9.71 closing at $175.33, which is almost exactly at the bullish support line that connects the December, April and June lows. A lower close could result in a major breakdown of the index.

What the Markets Are Saying

The major stock market indices have had an impressive run since just last Tuesday when a huge day of selling (the result of a fear of massive bank failures) took prices to reversal lows.

Since then, the Dow (DJI) has gained around 800 points and in just a week, fear has turned into measured optimism. The CBOE Volatility Index (VIX) has fallen from Tuesday's high of 30.81, a figure just shy of numbers that, in the past, have signaled an important bottom, to 21.31. This reading is a reminder that the bear could strike again.

The major indices have reached the first lines of resistance and, yesterday, moved slightly above them. But the next target is much more formidable and the resistance -- the result of six months of back-and-forth trading -- will be difficult to overcome.

Those resistance zones start at Dow 12,150, S&P 500 1,340 and Nasdaq 2,380.

A potentially favorable development for stocks is the falling price of crude oil, which yesterday dipped to under $125 a barrel. This could be a significant breakdown of key technical support for oil.

The Amex Energy SPDR (XLE) fell below its 200-day moving average, and yesterday's intraday low resulted in a 61.8% retracement of the big January-to-May advance -- this is a Fibonacci number and thus a possible significant reversal point.

If the XLE rallies from the current low number and crude oil prices go along with it, the stock market might roll over for a test of last Tuesday's sell-off numbers. But if crude oil and the XLE break yesterday's lows, crude could fall to $100 to $110 a barrel and stocks continue higher.

We are now at a critical technical area in virtually all markets. It is time to observe and let oil and stock prices tell us the direction of the next move.

Today's Trading Landscape

Earnings to be reported include: 3M Co (MMM), Affymetrix (AFFX), AmeriSourceBergen (ABC), Ashland (ASH), AutoNation (AN), Aware (AWRE), Ball Corp (BLL), Becton, Dickinson & Co (BDX), Belden (BDC), Benchmark Electronics (BHE), BMC Software (BMC), Bristol-Myers Squibb (BMY), Brunswick Corp (BC), Bucyrus Int'l (BUCY), Bunge Limited (BG) and Burlington Northern Santa Fe Corp (BNI).

Canon (CAJ), Cash America Int'l (CSH), Celgene Corp (CELG), Chartered Semiconductor Manufacturing (CHRT), Chubb Corp (CB), Cohu (COHU), Companhia Vale do Rio Doce (RIO), Credit Suisse Group (CS), Curtiss-Wright Corp (CW), Daimler AG (DAI), Diamond Offshore Drilling (DO), Dover Downs Gaming and Entertainment (DDE), Eastman Chemical Co (EK), Ecolab (ECL), Eli Lilly (LLY) and Ensco Int'l (ESV).

Federated Investors (FII), Flextronics (FLEX), Foundation Coal Holdings (FCL), Franklin Resources (BEN), Friedman Billings Ramsey (FBR), Global Payments (GPN), Goodrich Corp (GR), Harte-Hanks (HHS), Hub Group (HUBG), Ikon Office Solutions (IKN), Ingram Micro (IM), Insituform Technologies (INSU) and ITT Educational Services (ESI).

Janus Capital Group (JNS), Juniper Networks (JNPR), Kennametal (KNT), Kimberly-Clark (KMB), L-3 Communications (LLL), Laboratory Corporation of America (LH), Lee Enterprises (LEE), MeadWestvaco (MWV), Medco Health Solutions (MHS), Microchip Technology (MCHP) and Monro Muffler Brake (MNRO).

National City (NCC), Newfield Exploration (NFX), Newmont Mining Corp (NEM), Occidental Petroleum Corp (OXY), Old Dominion Freight Line (ODFL), Old Republic Int'l (ORI), Olin Corp (OLN), Performance Technologies (PTIX), Pixelworks (PXLW), Potash Corp of Saskatchewan (POT), Potlatch (PCH) and ProLogis (PLD).

RadioShack Corp (RSH), Rambus (RMBS), Raytheon (RTN), Regal Entertainment Group (RGC), Rohm and Haas Co (ROH), Roper Industries (ROP), Scholastic (SCHL), Silicon Image (SIMG), Smith Int'l (SII), Snap-on (SNA), Southwest Airlines (LUV), Strayer Education (STRA) and Suncor Energy (SU).

Taser Int'l (TASR), Technitrol (TNL), Teledyne Technologies (TDY), Terra Industries (TRA), The Cheesecake Factory (CAKE), The Dow Chemical Co (DOW), The McClatchy Co (MNI), Thermo Fisher Scientific (TMO), TradeStation Group (TRAD), Union Pacific (UNP), United Bankshares (UBSI) and UST (UST).

Varian Semiconductor Equipment Associates (VSEA), Wesco Int'l (WSC), West Marine (WMAR), Western Digital Corp (WDC), Wynn Resorts Ltd (WYNN), Xerox Corp (XRX), Zimmer Holdings (ZMH) and Zoll Medical (ZOLL).

In terms of economic reports, the Initial Jobless Claims for the July 19 week, the June Existing Home Sales and the DJ-BTMU Business Barometer for July 5 will be released.

Ford (F) has reported a loss of $8.67 billion which is a per-share loss of $3.88 versus estimates of a loss of 27 cents. Southwest Airlines (LUV) has announced 16 cents versus an expected 12 cents, and Amazon (AMZN) reported 37 cents versus an expected 29 cents per share after the close yesterday.

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