Sam Collins

Bad News Rules

by Sam Collins   07/25/08

The market paused from reviewing earnings reports to focus on economics, and what it saw was terrifying.

June existing home sales came in at 4.86 million, which was below the consensus forecast of 4.94 million and the lowest figure in more than 10 years. Furthermore, the inventory of unsold homes jumped to 11.1 months worth of supply from 10.8, indicating that a bottom to the downward spiral in home sales is not yet in sight.

After a spree of buying in financials stocks, which lasted for almost two weeks, sellers drove the group to a loss of 6.7%. Both Freddie Mac (FRE) and Fannie Mae (FNM) fell despite reports that the Senate was about to approve a new housing bill. Citigroup (C) fell 9.7%, Washington Mutual (WM) was clobbered for a loss of 12.9%, and UBS AG (UBS) fell 7.1%.

Ford (F) reported a Q2 loss of almost $9 billion and even Daimler AG (DAI) cut its outlook, as it reported a 25% drop in Q2 profits; Ford's stock fell 15.3% and Daimler fell 12.1%. After the big decline in sales for General Motors (GM), the auto sector, which has taken the brunt of a buyers' strike since the beginning of the 2008 model year, had analysts scratching their heads wondering what it would take to turn around the U.S. auto industry.

There was little in the way of good news from any part of the economy yesterday and unemployment was no exception. The Labor Department reported a large rise in first-time jobless claims; for the week ended July 19, claims were up 34,000 to 406,000.

At the close, the Dow (DJI) was down 283 points to 11,349, the S&P 500 (SPX) fell 30 points to 1,253 and the Nasdaq (NASD) lost 46 points and closed at 2,280.

With the renewed selling, volume topped 1.6 billion shares on the NYSE, while more than 1 billion shares traded on the Nasdaq. Declines outpaced advances on the Big Board by 4-to-1 and by 2-to-1 on Nasdaq.

The crude oil contract for September delivery gained $1.05, closing at $125.49 due to renewed tensions in Nigeria, and the Amex Energy SPDR (XLE) fell 18 cents to $73.61.

The August gold contract ended lower by 50 cents at $922.30 per troy ounce and the PHLX Gold/Silver Index (XAU) lost $3.12 closing at $172.21.

What the Markets Are Saying

It didn't take long for earnings to take a backseat to the economy.

Yesterday's news on existing housing and higher trending unemployment numbers brought sellers to the surface in a emotional surge of almost panic liquidations despite months of analysis on both of these trends.

The selling sent the major indices plummeting to just under the first line of chart resistance, and unless buyers can quickly turn things around the selling will probably provide us with the first test of the July 15 lows. Both the internal indicators (Moving Average Convergence/Divergence, Stochastic, Relative Strength Index, etc.) and the sentiment indicators (chiefly the CBOE Volatility Index, VIX) were telling us that the recent rally was likely to turn down soon despite the buying euphoria.

Yesterday, one of our favorite sources of sentiment, the American Association of Individual Investors Sentiment Survey, confirmed that the public is quick to move from bearish to bullish -- for four weeks the survey has recorded that its members have been more than 50% bearish but yesterday they switched to just 44% bearish -- that's not good. With that, the stock market suffered its worst day in months.

Coincidence?

Perhaps, but if you want to go long stocks this morning, you had better put on your helmet and fasten your seat belt, because the ride during the next couple of days could be rough.

Today's Trading Landscape

Earnings to be reported include: Alexander & Baldwin (ALEX), Arch Coal (ACI), Barnes Group (B), Beckman Coulter (BEC), Belo (BLC), Berry Petroleum Co (BRY), Black & Decker Corp (BDK), Ceradyne (CRDN), Coventry Health Care (CVH), Federal Signal (FSS), Federal-Mogul Corp (FDML), Fortune Brands (FO) and Frisch's Restaurants (FRS).

The following companies will also report earnings today: Gorman-Rupp (GRC), Honda Motor Co (HMC), ITT Corp (ITT), Lance (LNCE), Legg Mason (LM), MB Financial (MBFI), NBTY (NTY), Netflix (NFLX), NuStar Energy L.P. (NS), Republic Services (RSG), Saia (SAIA), Sierra Pacific Resources (SRP), Sify Limited (SIFY), Standard Register (SR), T. Rowe Price (TROW) and Viad Corp. (VVI).

The following economic reports are due today: the June durable goods orders, the June new home sales and the End-July Reuters/University of Michigan Sentiment Index.

Honda (HMC) posted an 8.1% rise in net for its April-to-June quarter, beating analysts' forecasts, but the company said it has trimmed its global auto sales forecast to 4.08 million from 4.14 million.

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Sam Collins can be reached directly at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.