Daily Market Reports | Jul 23 2010
By Greg Peel
The Dow jumped 201 points or 2.0% while the S&P gained 2.2% to 1093 and the Nasdaq leapt 2.7%.
What a difference a day makes. I have noted previously that daily movements during the meatier part of the US earnings season will be volatile as traders respond to good and bad results. Last night was a good session.
While there was a wealth of earnings reports to consider, the two which stood out for Wall Street were international heavy equipment manufacturer Caterpillar (Dow) and international freight company United Parcel Service. Both of these companies are considered reasonable economic bellwethers.
These two companies not only beat the Street on both earnings and revenue results but they also beat on third quarter guidance, shattering this week's trend of decent results accompanied by dour outlooks. What the two also have in common is that their success in the June quarter was all about foreign sales rather than domestic sales, particularly to our old friends the emerging markets.
While only two results amongst ultimately hundreds, Cat and UPS go some way to underscore the argument that despite ongoing global uncertainty and policy constraints, the likes of China and Brazil, to name two, simply have burgeoning domestic economies which are quietly rolling out of “emerging market” status, and that the underlying strength of the long term growth stories cannot be denied.
While domestic sales were nothing to write home about for Cat and UPS, one may also have expected Europe to have been a clammed up market. Not so.
Indeed, it has been noticeable over the past few months of European crisis that economic data have never really been that bad. Then last night the closely watched eurozone composite PMI was released, and everyone fell over. Economists had expected the index to fall to 55.2 in July from 56.0 in June but instead it rose to 56.7.
And if that wasn't enough to give markets a boost, the first real indication that the US may be over-talking the double-dip story came in the form of last night's US data releases.
Economists had expected new home sales to fall 10% in June, continuing the weak trend in the US housing market. But they only fell 5.1%. The median price rose 1.0%. The separate price index from the Federal Housing Finance Agency, which measures the prices of houses with Fannie/Freddie mortgages, rose 0.5%.
Economists had expected the Conference Board leading economic indicator index to have fallen 0.3% in June following a 0.5% rise in May, but it only fell 0.2%. Yes – it was still a fall, but not substantial and not out of whack with a typical post-recession experience of sudden bounce-back in growth followed by a settling back to more modest levels.
Maybe the Fed is on to something. But then the Fed has been calling for only modest growth for months now, and has only slightly downgraded due to Europe. On that front, Ben Bernanke faced the House last night and in following up on his “unusual uncertainty” call in front of the Senate on Wednesday, this time specifically said the Fed would reinstate monetary policy measures were the situation to deteriorate. Previously Bernanke had only suggested it was something the Fed was thinking about.
So we had good earnings results, good economic data in both Europe and the US, and a commitment from Uncle Ben that there is a safety net in place. What more could a stock market want?
Well a 3.6% jump in oil helps (US$2.74 to US$79.40/bbl) even if a new storm brewing in the Caribbean is also a factor. And a 2% jump in copper and 4% jump in nickel, amongst positive moves for all the metals in London last night, helps, even if they were driven only by technical traders and speculators.
The stock market always likes to see selling in US Treasuries – last night the ten-year yield jumped 5 basis points to 2.93%. All in all it was a classic “flight out of quality” night, with the US dollar index falling 0.8% to 82.63 and the Aussie dollar risk indicator leaping 1.5 cents to US$0.8934. Gold played off dollar weakness and rose US$8.40 to US$1194.50/oz.
As I said at the top – what a difference a day makes. But there is a certain underlying reality at work here.
The volume on the NYSE last night was on the thin side. Indeed, any time there's been a rally of this magnitude lately, it has not been supported by volume. By contrast, large falls have been driven by strong volume. We have also noted that, anecdotally, there are sellers lined up to sell into rallies. And we have noted, through activity in the VIX volatility index, that there are buyers lined up to buy at lower levels by selling out-of-the-money put options.
This market thus has a cap and a floor. The sellers backed off last night to let stocks run up in a vacuum, but they'll be ready to pounce. If stocks are slapped again, watch for the VIX to hold steady on option selling rather than jump up as would normally be the case. In between, day-traders can play the ups and downs of each individual earnings report or piece of economic data. But for investors, this market is only going one way – sideways.
Some advice from an old options trader to who had to suffer through 1994 to those who appreciate such things – sell volatility like there's no tomorrow. Slam those butterflies.
There was more after-market action as usual last night. The upshot is that American Express (Dow) posted a reasonable beat, Microsoft (Dow) posted a big beat, and Amazon – a stock that tends to trade at a high multiple – had a shocker. Amazon is the first stock of note this season which has actually beaten slightly on revenue but fallen well, well short of earnings forecasts. Its shares are down 13% in the after-market.
The SPI Overnight rose 64 points or 1.5%.
US earnings highlights tonight include Ford, Honeywell, McDonald's (Dow) and Verizon (Dow).
In Australia today, Woodside Petroleum ((WPL)) releases its quarterly production report.
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