How can we make yesterday sound exciting? Most of the “chatter” was about British Petroleum, the leak, costs, and would the company entertain a buyout, investment, or divestment of assets? BP’s stock was up nearly 8% on the day, but this has become such a speculative game that only traders are really involved in the wild swings. Tumbleweeds rolled around the rest of Wall Street, as the winds of change were yet to come. At the bottom of the July swing of pessimism, there were so many varied negatives that it started to look like the odds of a surprise favored the bulls. At the very most, it would take doom and gloom to drive the markets lower. I still am not convinced that the pattern constructed in the S & P over the past 9 months was a Head & Shoulders top, but it gained so much attention that the 1040 level became the “line in the sand”. We broke that overly obvious support point, but failed to generate the panic that should have ensued if we truly had formed such an ominous top. However, I do want to be on record for still looking at the post-earnings, late August/early September, timeframe as one where we should see the bears gain the upper hand and take the S & P lower. A larger correction in the fall has been our expectation since the end of last year (2010 Global Outlook) and remains our expected resolution to the summer rally.
What we are looking at right now is a market that has reversed off of a lower low and is in rally mode. This rally faces several obstacles. The fuel for this rally must be earnings, and that season officially kicked off yesterday. The market did finally move to discount the possibility of good news in some sectors. From the 1010 level on the S & P to yesterday’s high of 1080, we’ve rallied about 7%. Moving forward, and hopefully upward and onward, the next obstacle is the 10-week moving average at 1098. This level is also coincident with the downtrend line drawn from the April high through the June spike, currently crossing at 1098. Slightly higher is its 200-day moving average at 1111.69. It will take a strong catalyst to get us through this resistance. If we can breakout above the 200-day, I still consider the 1150 peak as rather significant overhead supply. It would likely take July and early August to get to this level, leaving us in a weak seasonal position. There are two catalysts that often favor the bears in the September timeframe. First is the fact that this is a flat to down year, for funds that have a fiscal year end in September. Prior to any “window dressing” that might occur, funds often look to offset gains with losses that hadn’t panned out and they don’t want to show on their books. Obviously, the poorer the performance of the year, the bigger the chance that funds have losses they want to take. Second, this is an election year. It doesn’t seem all that important in these dog-days of summer, but it will be an important factor come September/October. There is uncertainty associated with who will control the branches of government. Are these new individuals more polarizing? What will this mean for reform, especially tax and spending reform? In midterm elections, the higher state of decorum given to presidential election cycles (and I say this with tongue in cheek) is not adhered to. The mudslinging and name-calling during midterm elections is as negative a political environment as at any other time of the 4 year cycle. Cast it aside if you wish, but revisit the market lows at each midterm election going back in time, 2006 was minor, but 2002? How about 1998, 1994, and 1990? A second term strong president helped delay the inevitable to 1987. 1982? 1978? Shall I go on? Market historians for years have talked about this for years, if not decades. (I’ve been writing for over 20 years now, so I know.) Scoff if you wish, but at least keep it in the back of your mind.
The gun has sounded. Alcoa AA (-0.6%) reported earnings after the bell. The company posted a second quarter profit of 13c on revenues of $5.2 billion. The consensus was for 13c, but on revenues of $4.97 billion. Alcoa did increase its forecast for global aluminum consumption to 12% from 10%. The Dow component is the worst performing of the 30 stocks. After slipping a fraction of a percent during the day, it was up over 3% on the news. Alcoa’s 50-day moving average is at 11.41 and its high close since mid-May is 11.82. The stock closed at 10.87. If demand for an industrial and building metal gives us insight as to how the economy is doing, so does getting product to market. CSX Corp. CSX (+1.4%) posted profits of $1.07 on revenues of $2.7 billion. Expectations were for 98c on $2.64 billion.
Perhaps one of the most important companies to report this week is due out today, Intel INTC (1.6%). The reason is that analyst expectations have been falling. Since chips are in everything and Intel is a leader in the Semiconductor sector, it is naturally a catalyst for the Tech sector, and by extension, a measure of consumer demand. Intel is expected to report 43c on $10.25 billion, according to Thomson Reuters. Advanced Micro Devices AMD (+0.3%) reports on Thursday. Not all companies will give forward-looking statements, but investors will be hanging on every word that is offered. Volume was very light yesterday, as investors braced for the start of earnings season. That means they are in a comfortable position, based on expectations. Now we’ll see who gets rattled, the bulls or the bears.
How can we make yesterday sound exciting? Most of the “chatter” was about British Petroleum, the leak, costs, and would the company entertain a buyout, investment, or divestment of assets? BP’s stock was up nearly 8% on the day, but this has become such a speculative game that only traders are really involved in the wild swings. Tumbleweeds rolled around the rest of Wall Street, as the winds of change were yet to come. At the bottom of the July swing of pessimism, there were so many varied negatives that it started to look like the odds of a surprise favored the bulls. At the very most, it would take doom and gloom to drive the markets lower. I still am not convinced that the pattern constructed in the S & P over the past 9 months was a Head & Shoulders top, but it gained so much attention that the 1040 level became the “line in the sand”. We broke that overly obvious support point, but failed to generate the panic that should have ensued if we truly had formed such an ominous top. However, I do want to be on record for still looking at the post-earnings, late August/early September, timeframe as one where we should see the bears gain the upper hand and take the S & P lower. A larger correction in the fall has been our expectation since the end of last year (2010 Global Outlook) and remains our expected resolution to the summer rally.
What we are looking at right now is a market that has reversed off of a lower low and is in rally mode. This rally faces several obstacles. The fuel for this rally must be earnings, and that season officially kicked off yesterday. The market did finally move to discount the possibility of good news in some sectors. From the 1010 level on the S & P to yesterday’s high of 1080, we’ve rallied about 7%. Moving forward, and hopefully upward and onward, the next obstacle is the 10-week moving average at 1098. This level is also coincident with the downtrend line drawn from the April high through the June spike, currently crossing at 1098. Slightly higher is its 200-day moving average at 1111.69. It will take a strong catalyst to get us through this resistance. If we can breakout above the 200-day, I still consider the 1150 peak as rather significant overhead supply. It would likely take July and early August to get to this level, leaving us in a weak seasonal position. There are two catalysts that often favor the bears in the September timeframe. First is the fact that this is a flat to down year, for funds that have a fiscal year end in September. Prior to any “window dressing” that might occur, funds often look to offset gains with losses that hadn’t panned out and they don’t want to show on their books. Obviously, the poorer the performance of the year, the bigger the chance that funds have losses they want to take. Second, this is an election year. It doesn’t seem all that important in these dog-days of summer, but it will be an important factor come September/October. There is uncertainty associated with who will control the branches of government. Are these new individuals more polarizing? What will this mean for reform, especially tax and spending reform? In midterm elections, the higher state of decorum given to presidential election cycles (and I say this with tongue in cheek) is not adhered to. The mudslinging and name-calling during midterm elections is as negative a political environment as at any other time of the 4 year cycle. Cast it aside if you wish, but revisit the market lows at each midterm election going back in time, 2006 was minor, but 2002? How about 1998, 1994, and 1990? A second term strong president helped delay the inevitable to 1987. 1982? 1978? Shall I go on? Market historians for years have talked about this for years, if not decades. (I’ve been writing for over 20 years now, so I know.) Scoff if you wish, but at least keep it in the back of your mind.
The gun has sounded. Alcoa AA (-0.6%) reported earnings after the bell. The company posted a second quarter profit of 13c on revenues of $5.2 billion. The consensus was for 13c, but on revenues of $4.97 billion. Alcoa did increase its forecast for global aluminum consumption to 12% from 10%. The Dow component is the worst performing of the 30 stocks. After slipping a fraction of a percent during the day, it was up over 3% on the news. Alcoa’s 50-day moving average is at 11.41 and its high close since mid-May is 11.82. The stock closed at 10.87. If demand for an industrial and building metal gives us insight as to how the economy is doing, so does getting product to market. CSX Corp. CSX (+1.4%) posted profits of $1.07 on revenues of $2.7 billion. Expectations were for 98c on $2.64 billion.
Perhaps one of the most important companies to report this week is due out today, Intel INTC (1.6%). The reason is that analyst expectations have been falling. Since chips are in everything and Intel is a leader in the Semiconductor sector, it is naturally a catalyst for the Tech sector, and by extension, a measure of consumer demand. Intel is expected to report 43c on $10.25 billion, according to Thomson Reuters. Advanced Micro Devices AMD (+0.3%) reports on Thursday. Not all companies will give forward-looking statements, but investors will be hanging on every word that is offered. Volume was very light yesterday, as investors braced for the start of earnings season. That means they are in a comfortable position, based on expectations. Now we’ll see who gets rattled, the bulls or the bears.