Comtex SmarTrend(R) Morning Call -- September 8, 2010
Stock prices declined Tuesday on renewed concerns that European banks were less healthy than previously reported. The DJIA declined 107 points to close at 10,341. The DJIA had been forecasted here to encounter stiff resistance at 10,444, and so it did. The SmarTrend(R) indicator movements signal the struggle to keep from declining more is likely to fail.
Fresh worries about European banks arose after the Wall Street Journal reported that major bank holdings in shaky sovereign debt examined during stress tests were inadequate. Also adverse to banks was as report from the German banking association that its 10 biggest banks may need to raise over $100 billion in new capital as regulators tighten rules designed to prevent future problems. These reports were the catalysts that began the pullback by the market indices from their overbought zones, and stock selling was reflected in the daily SmarTrend(R) uptrends to downtrends, which cooled off as anticipated, but remained biased to the upside at 34:7. This performance was insufficient to keep the IBDI from falling and the Trend Ratio flat, confirming the intermediate-term trend is unable to help lift stocks. Furthermore, the long-term downtrend continued on its course southward. Both its trends caused the investing environment to remain slightly unfavorable for long stock positions.
The trading environment trends had reached their overbought state Friday, and were especially vulnerable to bad news before open yesterday. The DJIA had already climbed to meet resistance at 10,444 and the S&P500 was close to its resistance at 1,114. This corresponded closely to the state of the near-term trend indicators, three of which were overbought and all three retreated slightly yesterday. More indicator declines are in the offing, but at this level it is likely that several attempts by market indices to climb above resistance levels will be made for the rest of this week.
These attempts may be described by some as evidence of continuing uptrend strength, and already yesterday's light volume pullback is being characterized that way. However, the SmarTrend(R) indicators signal something else. When the investing environment trends are following a shallow slope down (or up) and thus are having little influence on stock price directions, those prices are most likely to show gyrations, up and down, that cause misleading interpretations due to higher volatility during mainly sideways movements of market indices. Thus the trade-term trend, which usually reacts first and most, but with very short in duration impacts, to any market moving news, often defines for a day or two price movements. More is in store today. The news from the White House regarding proposals to stimulate employment are perceived as too-little-too-late and the other news expected today, and discussed below, are the Fed afternoon beige book release and reports on crude inventories and consumer credit changes. The former may cause the trade-term trend to rally and the latter cause it to fall. So another day of choppy sideways movement of stock prices should unfold. Some analysts are forecasting a range-bound market will continue until after the elections when a sharp rally will ensue. Unfortunately, the traditional rally that follows a new Congress may not happen this year as at the moment the new people elected are likely to demand reductions in spending future dollars for current needs. This policy shift may prove beneficial in the long run, although a difficult change for politicians to make; but since it has been deficit spending and a concomitant increase in U.S. sovereign debt that has lifted stock prices since March of 2009, it is difficult to support the notion that the new Congress will be helpful to stock prices. Maybe an improving economy will help, but that appears to be so slow in coming that the fall in the fall forecasted here previously still looms as the most likely salient trend in stocks until sometime in 2011. To review the stocks changing trends recently, please visit http://www.mysmartrend.com.
September is normally touted as a tough time for equities, a month also notable for the return of traders from summer holidays. However, the month began with a four-session-straight string of aces, as S&P500 stocks rose 3.7% for the week, following better-than-expected US economic data throughout the week and a Friday bonus of estimate-topping growth in private sector hirings during August. However, Tuesday opened the holiday-shortened week with risk-off sentiment back in play, the S&P500 off 1.2%, trading volume light and old fears resurfacing. A WSJ article noted inadequacies in recent stress tests on European banks that underestimated sovereign debt holdings, hardly a fresh criticism, but still sufficient to place global growth uncertainties back in play.
The day's tally revealed the DJIA down 1% to 10,341; the NASDAQ off 1.1% to 2209; and the S&P500 off 1.2% to 1092. Volume slowed to only 0.830 billion on the NYSE. The CBOE Vix "fear factor" index plummeted 11.7% to 23.80. Crude prices fell 51 cents to $74.09, for their sharpest drop since August 31.
Safe-haven plays drew in the anxious. Comex gold prices for October and December delivery rose to record highs. The US dollar jumped 1.1% against a basket of foreign currencies. Prices on US Treasuries also increased, with the 10-year up 10/32 in price as its yield dropped to 2.598%. An auction of $33 billion in 3-year notes sold at a record low yield of 0.79% Tuesday; today's schedule calls for a $21 billion sale of 10-year paper.
Why the sudden return to summer's pattern of scanty volume and limited risk appetites? Oppenheimer's chief strategist yesterday lowered projections for S&P500 at yearend to 1225 from 1325 earlier, citing the "deceleration of important economic indicators." Additional reductions were made at Birinyi Associates, with a drop to 1225 from 1325 for 2010, and at Barclays (NYSE: BCS) where the estimate was cut to 1120 from 1210. Last week's hope for upward revisions to risk willingness foundered against countervailing doubts of the recovery's sustainability. In short, investors appear consistently unwilling to accept riskier asset allocations without a clearer picture of global growth prospects, growing skeptical of valuation assumptions based upon dubious future expectations.
The WSJ report on underestimated sovereign debt holdings among Europe's banks supplemented headline photos of citizenry unrest on the continent over austerity programs there, a Monday report from the Association of German Banks noting Germany's ten largest lenders may require about $134 billion additional capital, as well as a German government release showing a surprise drop in July factory orders for the continent's strongest economy. Japanese and Australian central banks held interest rates steady in policy decisions that cited concerns over diminishing prospects for the US recovery.
Only four of the DJIA thirty managed gains on the session, with decliners topped by a 4.1% plunge in American Express (NYSE: AXP) shares, and over 2% drops in Disney (NYSE: DIS), off 2.4%, JP Morgan (NYSE: JPM), off 2.3%, Bank of America (NYSE: BAC), off 2.2%, and Cisco (NASDAQ: CSCO), off 2.2%. Gainers included McDonald's (NYSE: MCD), up 1%, General Electric (NYSE: GE), up 0.3%, Coca-Cola (NYSE: KO), up 0.1% and Verizon (NYSE: VZ), up 0.1%.
A 2.3% fall in S&P500 financial shares led drops in all ten industry sectors, joined by declines in: oil and gas (-1.6%), consumer services (-1.4%), industrials (-1.1%), tech (-0.9%), basic materials (-0.9%), utilities (-0.7%), consumer goods (-0.7%) health care (-0.7%) and telecommunications (-0.4%).
This morning freshens with chilling reports of cooling Asian trade. The Nikkei closed off 2.2% as the safety-linked yen climbed to a fresh, 15-year high against the US dollar, driving Japanese exporters' shares lower.
The futures point to a slightly higher opening to US equity markets, as European shares turned higher on bankers' assurances and bargain hunters stepped in. In European news, the National Bank of Greece warned it need to raise an additional $3.56 billion. Germany's recent report of slower-than-expected growth in July industrial orders was joined by a 1.5% MoM decline in July exports. The softening pace of growth for the continent's strongest nation appeared consistent with fears for health throughout the eurozone, especially as austerity measures grow teeth. However, analysts offered assurance that Germany's export strength from China demand is expected to continue.
President Obama's push for fresh stimulus measures, including a new $200 billion tax cut for business purchasing on new investments appears more politically engendered than potentially impactful; however, the headlines once more raises the specter of uncertainty over the recovery's grip. Such concerns will focus on this afternoon's release of the Fed Beige Book, the anecdotal recount of economic insight among the Fed districts. Consumer credit for July is expected to show a $4.3 billion decline following June's 1.3 billion drop.
According to our analytics team, the trading environment trends had reached their overbought state Friday, and were especially vulnerable to bad news before yesterday's open. The DJIA had already climbed to meet resistance at 10,444 and the S&P500 was close to its resistance at 1,114. This corresponded closely to the state of the near-term trend indicators, three of which were overbought and all three retreated slightly yesterday. More indicator declines are in the offing, but at this level it is likely that several attempts by market indices to climb above resistance levels will be made for the rest of this week. To examine the list of stocks changing trends in the last week, please visit http://www.mysmartrend.com.
In the corporate corner, after yesterday's close Bristol-Meyers (NYSE: BMY) announced plans to acquire ZymoGenetics (NASDAQ: ZGEN) for $9.75 per share, in a deal valued at 885 million.
A Bloomberg report noted Vodafone (NASDAQ: VOD) will sell its stake in China Mobile (NYSE: CHL) for $6.6 billion.
Smithfield Foods (NYSE: SFD) posted inline fiscal first quarter earnings of 46 cents on a 6.9% revenue increase to $2.90 billion, off estimates of $3.06 billion.
Phillips-Van Heusen (NYSE: PVH) reported better-than-expected second quarter earnings of 72 cents, up from estimates of 54 cents on inline revenues of $1.1 billion, up 108% YoY. The firm also offered upside fiscal 2011 earnings and revenue guidance, with earnings of $3.70-$3.80 and revenues of $4.44-$4.47 billion anticipated.
Navistar (NYSE: NAV) release estimate-topping second quarter earnings of $1.83, up from estimates of $1.47, on revenues of $3.22 billion, shy of estimates of $3.55 billion.
UBS (NYSE: UBS) downgraded shares of Intel (NASDAQ: INTC) to "neutral" from "buy," on slowing demand near-term for PCs.
Goldman Sachs (NYSE: GS) upgraded Staples (NASDAQ: SPLS) to "Conviction Buy" from "neutral," raising the price target from $22 to $23.
Wells Fargo (NYSE: WFC) initiated coverage of Transocean (NYSE: RIG) at "outperform," with a target price range of $70-$72.
By Chip Brian, Editor-in-Chief, Comtex news Network
www.Comtex.com -- editor@mysmartrend.com
The following equities mentioned above include:
Comtex SmarTrend Alert
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Ticker Last Close Trend Direction Trend Price Trend Date
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CSCO 20.58 Downtrend 21.31 8/12/2010
ZGEN 5.30 Uptrend 4.75 8/13/2010
VZ 30.22 Uptrend 28.53 7/27/2010
KO 57.63 Uptrend 52.28 7/9/2010
MCD 75.80 Uptrend 69.48 7/12/2010
INX -- S&P 500: 1,092 Lo: 1,091 Hi: 1,103 Change: -12.67
http://www.mysmartrend.com/images/INX20100908.jpg
INDU -- DOW JONES: 10,341 Lo: 10,332 Hi: 10,447 Change: -107.24
http://www.mysmartrend.com/images/INDU20100908.jpg
QQQQ -- NASDAQ: 2,209 Lo: 2,207 Hi: 2,231 Change: -24.86
http://www.mysmartrend.com/images/QQQQ20100908.jpg
This report is divided into three sections. The first deals with our 5 proprietary market indicators, the second section examines important economic and business happenings which are expected to affect U.S. Stock market movements and the third section describes specific company announcement and earnings releases. Experience demonstrates that when these 5 indicators reach extremes they can shortly be expected to change direction and move in the opposite direction. When such happens in all or most of the 5 indicators, on or about the same time, followed by a move from below an extreme (oversold) to above that extreme (or vice versa for overbought), a change in market direction is very probable. The near term market moves are measured to identify the best possible returns for traders/investors. Daily price/volume examinations provide the best data upon which to base such forecasts. In this report though, intraday indicators are examined to improve the point of entry timing for the expected move.
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