The pendulum swung more aggressively to the bulls’ favor, as earnings, trade, and economic expectations rose. Monday evening, Alcoa AA (+1.2%) reported earnings that met official estimate, but the whisper number had been fading. Therefore, meeting expectations was good news. For the broader market, the company raised expectations for global demand to rise by 12% from 10%. Being an industrial metal, Alcoa is simply forecasting improved global growth. CSX Corp. CSX (-1.4%) also reported better numbers. Again, their comments were a positive catalyst. The rail company said metals freight rose 44%, year-over-year. Freight of Chemicals gained 10%. Lumber was up just 2%. Delivery of raw material is a lead indicator for the economy, so a positive sign. US stock futures showed some real resilience as China’s Shanghai Composite fell 1.6% on word that Beijing would not ease restrictions on their tightening policies on the property market. Then India’s bellwether Tech stock, Infosys Tech INFY (-3.6%) fell shy of earnings expectations as wage costs ate up more profits than anticipated. Do you see what happens when you hire people? US companies did not make this mistake. Over in Europe, the news was mixed. Moody’s cut Portugal’s bond rating by two notches to A1 from Aa2, expecting further financial and economic weakness. There were some positives. Greece’s government sold $2 billion worth of 26-week bills at 4.65%, up slightly from 4.55% with a bid-to-cover of 3.64 times. Bloomberg also reported that France and Germany may be leading an effort to make the Basel rules less stringent. After Portugal’s PSI 20 Index shook off the bad news and closed slightly higher, the major European Indices rallied about 2%.
Overall, investors are looking at the news with its implications to the broader economy. The recent change in sentiment raised fears that the economy would report slower growth in Q2 and would be on a weaker footing heading into Q3. The expanding trade deficit was considered good news. The May gap rose to $42.3 billion from $40.3 billion. Expectations were for a contraction to $39 billion. International trade has been a worrisome component, as China moves to slow its economy and Europe strives to prevent a recession. This is why the 2.4% increase in exports was so well received. Imports rose more, up 2.9%, due to an increasing demand for cars, pharmaceuticals, toys, and clothing. These are consumer items, not just petroleum imports driving up the trade gap. That means the consumer is not dead, as many had feared. This is one of those numbers where the details matter.
The improvement in the economic outlook gave rise to crude, gold, and the other basic materials. Crude followed investors’ pessimism over the slowing of growth in Q3, falling from $86 in April to a low that momentarily undercut $65 in May. Since then, crude has consolidated in the middle of that range, between $70 and $80. The better news on the economy pushed crude up to challenge its 200-day moving average at $77.33 before fading a bit and closing just below that level. Part of this strength was due to the action in the Euro. Given the downgrade in Portugal’s debt, it would have been acceptable to see the Euro dip, which it did initially. However, the Euro came back strong and broke above an important level. If one draws the long-term downtrend line from the December 2009 peak, through the failed rally attempt in April, that line stopped the rally in the Euro last week right at 1.2722. That line, which is still declining, crossed yesterday at 1.2684. When the Euro pushed to 1.2739, it moved to its highest print in two months, topped last week’s intraday high, and broke above the downtrend line. It may have to prove itself a bit more here, but it is very positive action. Of course, the Dollar is on the flip side of that move, breaking down to a two month low. The Dollar is still very strong, but since multinational earnings are expected to be adversely impacted by the Dollar’s strength, it’s recent decline below the trading range of May and June should give investors hope that Q3 won’t see another adverse currency adjustment when earnings are reported in October.
With earnings still due out for several of the banks, the S & P Financial SPDR, XLF, showed real strength. It started with State Street Bank STT (+3.3%), which gave a lift to the sector back on July 7th when it said its earnings would be 93c versus estimates for 72c and raised the guidance for the year. That started a rally in the ETF that stalled after filling a gap at 14.46, but just for a couple of days to consolidate. Yesterday, ahead of earnings due out from Bank of America BAC (+3.0%), JP Morgan & Chase JPM (+3.3%), and Citigroup C (+4.6%), the XLF gapped higher to challenge its 200-day moving average at 14.95. This is an impressive move ahead of earnings, putting the index at the brink of breaking out to the upside above 15.05, which would be a two month high. Why get so excited about breaking above these little two-month patterns? The answer is simple: the recent breakdown caused great concern, technically. By moving back above the previous high, it negates the implication of the breakdown. The new low is the new support for technicians. It’s not as though the breakout should yield a great upside target, but technical and trader types should reevaluate their commitment to the previous negative pattern, easing the bearish talk. Just look at the Volatility Index, VIX. After spiking to 48 in May, the index is back into the lower end of the 20-30 normal range, closing at 24.56.
Intel INTC (+2.1%) reported after the bell. The company reported 51c on revenue of $10.8 billion. The company pulled no punches comparing it to last year’s 7c loss. Expectations were for 43c on $10.25 billion. It was the “best quarter in the company’s 42-year history”. The PC client group was up 31% and the data center group was up 42% (year-over-year of course). Gross profit margins hit a record in Q4 quarter at 65%. Consider that dust in the wind, as margins improved to 67%. They expect to keep that margin in Q3 on revenues of $11.2 billion. The stock was up over 7% after hours. Expeditors Intl. EXPD (+2.9%) announced earnings would be 38c to 40c versus estimates for 30c. “Double-dip?” Who said double-dip?
The pendulum swung more aggressively to the bulls’ favor, as earnings, trade, and economic expectations rose. Monday evening, Alcoa AA (+1.2%) reported earnings that met official estimate, but the whisper number had been fading. Therefore, meeting expectations was good news. For the broader market, the company raised expectations for global demand to rise by 12% from 10%. Being an industrial metal, Alcoa is simply forecasting improved global growth. CSX Corp. CSX (-1.4%) also reported better numbers. Again, their comments were a positive catalyst. The rail company said metals freight rose 44%, year-over-year. Freight of Chemicals gained 10%. Lumber was up just 2%. Delivery of raw material is a lead indicator for the economy, so a positive sign. US stock futures showed some real resilience as China’s Shanghai Composite fell 1.6% on word that Beijing would not ease restrictions on their tightening policies on the property market. Then India’s bellwether Tech stock, Infosys Tech INFY (-3.6%) fell shy of earnings expectations as wage costs ate up more profits than anticipated. Do you see what happens when you hire people? US companies did not make this mistake. Over in Europe, the news was mixed. Moody’s cut Portugal’s bond rating by two notches to A1 from Aa2, expecting further financial and economic weakness. There were some positives. Greece’s government sold $2 billion worth of 26-week bills at 4.65%, up slightly from 4.55% with a bid-to-cover of 3.64 times. Bloomberg also reported that France and Germany may be leading an effort to make the Basel rules less stringent. After Portugal’s PSI 20 Index shook off the bad news and closed slightly higher, the major European Indices rallied about 2%.
Overall, investors are looking at the news with its implications to the broader economy. The recent change in sentiment raised fears that the economy would report slower growth in Q2 and would be on a weaker footing heading into Q3. The expanding trade deficit was considered good news. The May gap rose to $42.3 billion from $40.3 billion. Expectations were for a contraction to $39 billion. International trade has been a worrisome component, as China moves to slow its economy and Europe strives to prevent a recession. This is why the 2.4% increase in exports was so well received. Imports rose more, up 2.9%, due to an increasing demand for cars, pharmaceuticals, toys, and clothing. These are consumer items, not just petroleum imports driving up the trade gap. That means the consumer is not dead, as many had feared. This is one of those numbers where the details matter.
The improvement in the economic outlook gave rise to crude, gold, and the other basic materials. Crude followed investors’ pessimism over the slowing of growth in Q3, falling from $86 in April to a low that momentarily undercut $65 in May. Since then, crude has consolidated in the middle of that range, between $70 and $80. The better news on the economy pushed crude up to challenge its 200-day moving average at $77.33 before fading a bit and closing just below that level. Part of this strength was due to the action in the Euro. Given the downgrade in Portugal’s debt, it would have been acceptable to see the Euro dip, which it did initially. However, the Euro came back strong and broke above an important level. If one draws the long-term downtrend line from the December 2009 peak, through the failed rally attempt in April, that line stopped the rally in the Euro last week right at 1.2722. That line, which is still declining, crossed yesterday at 1.2684. When the Euro pushed to 1.2739, it moved to its highest print in two months, topped last week’s intraday high, and broke above the downtrend line. It may have to prove itself a bit more here, but it is very positive action. Of course, the Dollar is on the flip side of that move, breaking down to a two month low. The Dollar is still very strong, but since multinational earnings are expected to be adversely impacted by the Dollar’s strength, it’s recent decline below the trading range of May and June should give investors hope that Q3 won’t see another adverse currency adjustment when earnings are reported in October.
With earnings still due out for several of the banks, the S & P Financial SPDR, XLF, showed real strength. It started with State Street Bank STT (+3.3%), which gave a lift to the sector back on July 7th when it said its earnings would be 93c versus estimates for 72c and raised the guidance for the year. That started a rally in the ETF that stalled after filling a gap at 14.46, but just for a couple of days to consolidate. Yesterday, ahead of earnings due out from Bank of America BAC (+3.0%), JP Morgan & Chase JPM (+3.3%), and Citigroup C (+4.6%), the XLF gapped higher to challenge its 200-day moving average at 14.95. This is an impressive move ahead of earnings, putting the index at the brink of breaking out to the upside above 15.05, which would be a two month high. Why get so excited about breaking above these little two-month patterns? The answer is simple: the recent breakdown caused great concern, technically. By moving back above the previous high, it negates the implication of the breakdown. The new low is the new support for technicians. It’s not as though the breakout should yield a great upside target, but technical and trader types should reevaluate their commitment to the previous negative pattern, easing the bearish talk. Just look at the Volatility Index, VIX. After spiking to 48 in May, the index is back into the lower end of the 20-30 normal range, closing at 24.56.
Intel INTC (+2.1%) reported after the bell. The company reported 51c on revenue of $10.8 billion. The company pulled no punches comparing it to last year’s 7c loss. Expectations were for 43c on $10.25 billion. It was the “best quarter in the company’s 42-year history”. The PC client group was up 31% and the data center group was up 42% (year-over-year of course). Gross profit margins hit a record in Q4 quarter at 65%. Consider that dust in the wind, as margins improved to 67%. They expect to keep that margin in Q3 on revenues of $11.2 billion. The stock was up over 7% after hours. Expeditors Intl. EXPD (+2.9%) announced earnings would be 38c to 40c versus estimates for 30c. “Double-dip?” Who said double-dip?