Daily Market Reports | Jul 21 2009
By Greg Peel
The Dow rallied 104 points or 1.2% while the S&P added 1.1% to 951 and the Nasdaq added 1.2%.
When the correction rally began in March, many an observer set 950 as the rally target for the S&P 500. Last night the index closed at 951, eclipsing the previous rally-high of 946. The S&P is now up 5% in 2009. Last night the Dow also hit a new high at 8848, but it is only up 0.8% for 2009. The Nasdaq had already hit a new high last week and is up 21% in 2009.
Why the difference? Another popular call made early in the proceedings was that the tech sector would lead the stock market out of its depths. Clearly it has. The reason is that while traditional cyclical industries have stalled in the global recession, the tech sector is cashing in on its export markets. It is still selling iPhones to the world, for example, and selling first phones, computers and other toys to emerging markets.
In the case of the Dow, the simple reason for its comparatively weak performance is the implosion of big names within it. AIG, General Motors, Citigroup and Bank of America all fell to very low stock prices as bankruptcy beckoned and JP Morgan also wobbled. The average of what is meant to be America’s 30 “biggest” companies has now been rejigged such that the first three names on that list are no longer components. The Dow is thus still trying to catch up, and relying on the tech sector to do it. IBM is now the biggest stock in the average – ahead of Exxon – and the list contains Microsoft, Intel, Hewlett Packard and newcomer Cisco.
The index which best tracks the broad economy is the S&P with its 500 components. And Standard & Poor’s is a lot quicker to play promotion and relegation than Dow Jones ever is.
The S&P was very much the focus last night, given the new high was driven by a report from Goldman Sachs. Goldman’s analysts upgraded their year-end expectation for the S&P from 940 to 1060, equating to a 15% rise above the June 30 close. If they’re right, it would represent the steepest second-half rally since 1982.
Tech may have led us to this point, but Goldman believes it’s now time for the cyclicals to kick in. Cyclicals are those companies whose fortunes are pegged to the fate of the broader economy, such as materials, energy, industrials and consumer discretionary. Your non-cyclicals or “defensives” include consumer staples, utilities and healthcare. The analysts believe early-season earnings reports are usually a good barometer for what’s going to happen next. Clearly they have faith in economic recovery.
Supporting the stance was a big rise in US leading economic indicators, reported last night as rising 0.7% against 0.4% expectations. These indicators attempt to project about six months down the track.
Also driving the market last night was news that CIT bondholders had agreed to a fresh injection of US$3bn in order to keep the large SME lender out of bankruptcy. Commentators suggested the fact the bondholders were prepared to extend further credit was a positive sign of the easing of total risk aversion.
Earnings reports last night included Hasbro, which posted strong domestic revenues and surprised the Street, and Halliburton, which saw its profit fall 48% for the quarter (shame) but nevertheless beat expectations.
After the bell, Texas Instruments just beat both earnings per share and revenue expectations, and offered Q3 guidance slightly above forecasts. Having already posted strong gains in anticipation, Texas shares are off slightly in the after-market.
The financial sector continues to fracture into the haves and have-nots (just as many a commentator warned would happen if you don’t let nature run its course). The big “investment” banks (strictly they are all now commercial banks but the label lingers) such as Goldman Sachs and Morgan Stanley and, to a lesser extent, JP Morgan, are seeing investor buying while the big money centres such as Citigroup (down 7% last night) and Bank of America (down 5%) are not. Stock analysts have issued timid reports on the once Big Two.
As the stock market continues to attract buying, thus reigniting risk investment, the US dollar continues to slide. Last night the index hit 78.82 and is threatening to crash through chart resistance. The weaker dollar and general positive economic sentiment is good for commodities, sending oil up US42c to US$63.98/bbl and most base metals up around 1%, except for zinc (up 3%) and tin (up 5%).
Gold continues to benefit from the weaker US dollar, but the fact investors are still buying gold in the face of a return to the risk trade implies ongoing inflation concerns down the track. Gold was up US$11.60 to US$949.30/oz.
The Aussie has shot up over a cent since Friday night, back up to US$0.8169. The Aussie was clearly not fazed by yesterday’s weak local PPI number, which implied any RBA rate hike is a long way off yet. The stock market also took that as a good sign, even though falling wholesale prices imply a lack of end demand.
The ASX 200 will join the “new high” club this morning, having closed only 22 points below the previous high of 4062 yesterday.
So if the S&P 500 has now hit what many had pencilled in as the high target, what does that mean? Do we now ring the bell and go back down, deciding the extraordinary rally which began last week is yet another sign of too much exuberance? Or do we truck on through?
While so many up-days in a row would tend to suggest a down-day is nigh, the momentum is clearly to the upside. This latest leg of the rally began with short-covering, but as positive earnings reports (at least on the earnings line) continue to flow the sidelined money in the US is now heading back into the market to rejoin the party. Barring any sudden shocks, one would think this breach of the high suggests a new leg up.
And now that I’ve said that, watch it fall like a stone. But the VIX is back at 24 now following a rapid spate of call-buying last week. If it falls below 20, then we can probably ring the bell.
The SPI Overnight was up 42 points or 1%.
