A short-covering rally — prompted by the Fed Chairman’s lack of interest in nationalizing the major troubled banks — eased some worries about the future of those banks. And leading the charge were the financials, due to a late-Monday announcement by JPMorgan Chase (JPM) that it was cutting its dividend.
The market response was the strongest in more than a month and preceded President Barack Obama’s important speech to Congress and the nation.
The speech was heralded as an upbeat presentation with a more hopeful tone than his previous warnings. According to The Wall Street Journal, the White House was billing the speech as “a rhetorical salve to a nation battered by layoffs, foreclosures, plunging stock prices, and shriveling savings.”
Since Obama’s inauguration, the stock market has fallen more than 10%, and Wall Street is hoping that the new president will not only provide ho pe but flesh out some details to his plan rather than just presenting a new list of talking points.
After the speech, The Wall Street Journal said, “Despite the recession and a large budget deficit, Mr. Obama promised to press forward with major initiatives in health care, energy, and education. He warned the nation’s major banks, teetering on the brink of collapse, that he will “force the necessary adjustments” to push them back to viability, even as he conceded those banks will likely need even more money from the federal government than the $700 billion in the initial bailout.”
But the speech was both challenging and upbeat and was “about trying to give Americans some optimism amid the gloom.”
Twenty-nine of the 30 stocks in the Dow Jones Industrial Average (DJI) advanced, with Microsoft (MSFT) emerging as the only loser, off just 4 cents. The leaders of the Dow were Citigroup (C), up 21.50%, American Expre ss (AXP), up 12.1%, and General Motors (GM), up 25.542%. The Dow gained 3.3% and broke a six-day losing streak.
Although the focus was on Fed Chairman Ben Bernanke’s testimony and every word from the White House advance team, other corporate earnings did have some impact.
H.J. Heinz (HNZ) and Macy’s (M) reported better-than-expected earnings, as did Nordstrom (JWN) and Home Depot (HD). The gains by the retailers were especially welcome in light of the Conference Board’s report indicating that consumer confidence fell to a record low in February.
In other economic news, home prices dropped another 2.5% in December and were down a record 18.5% from December 2007.
At the close, the Dow Jones Industrial Average (DJI) gained 236 points to end at 7,351, the S&P 500 (SPX) rose 30 points to 773, and the Nasdaq (NASD) gained 54 points, closing at 1,442.
The New York Stock Exchange traded 1.8 billion shares, with advancers ahead by more than 6-to-1. On the Nasdaq, 955 million shares were exchanged, with advancers there ahead by 3-to-1.
The April crude oil contract rose $1.52 to $39.96 a barrel, and the Amex Energy SPDR (XLE) closed at $42.30, up $1.90.
Gold retreated again from its record high made on Friday by falling $25.50 to $969.10 per troy ounce, but analysts cited profit taking as the only reason for the pullback. The PHLX Gold/Silver Index (XAU) closed at $119.24, off $9.09.
What the Markets Are Saying
Just one day after hitting new lows, the major averages reversed course for the strongest day in a month.
The rally was touted as a response to Chairman Bernanke’s testimony and the anticipation of the president’s speech. But technical analysis has been telling us that the markets have been due for a rally.
I pointed out in yesterday’s Daily Market Outlook that the market was so extremely oversold that a rally was overdue, de spite new lows in the Dow (DJI), which confirmed that the bear market was still with us.
And on Monday, I said “If, however, a rally does not materialize this week and the S&P and the Nasdaq fall to new lows, then a new leg will be added to the bear market. But traders should be alert to the high probability of a violent bear-market reflex rally with a Dow target of at least 8,400.”
The conclusion that we were due for a rally was drawn from our internal indicators — chiefly the Moving Average Convergence/Divergence (MACD), stochastic and momentum — and the sentiment indicators, chiefly the CBOE Volatility Index (VIX), the CBOE Nasdaq Volatility Index (VXN), the weekly American Association of Individual Investors (AAII) Sentiment Survey, data about insider buy/sells, and letter writers’ sentiment taken from the weekly report from Investors Intelligence.
Yesterday, my Trade of the Day concluded with “But the indices and most sectors are now so oversold that a reflex bounce is highly likely. For traders this is not the time to take positions on either side of the market. And long-term investors should refrain from adding new positions to portfolios.”
But yesterday, the market made known its near-term direction and as long as Congress members and administration officials don’t react with more talk of nationalizing the banks, the Dow (DJI) should be able to rally to the 8,000 to 8,400 area before running into sellers.
And if Monday’s low holds, we could be trading in a range of Dow 7,200 to 8,400 and S&P 500 (SPX) 750 to 875 for most of this year … and, perhaps even see Monday’s low in the S&P 500 develop into the right shoulder of a double-bottom.
Today’s Trading Landscape
Earnings of note to be reported include: Aercap Holdings N.V., Ambac Financial Group, American Equity Investment Life Holding Co, Ameri can Water Works Co, Angeion Corp, ASM Int’l N.V., Assured Guaranty, Atlas Energy Resources and Avis Budget Group.
Banco Itau Holding Financeira S.A., Berry Petroleum Co, Cadbury plc, CenterPoint Energy, Central European Media Enterprises, Chart Industries, Chemtura Corp, Clean Harbors, Cliffs Natural Resources, CMS Energy Corp, Coca-Cola Femsa S.A. de C.V., Cogdell Spencer, Cogent and Copano Energy LLC.
DCP Midstream Partners L.P., Del Monte Foods, Denbury Resources, DineEquity, Discovery Communications, Dollar Tree Stores, Donaldson, Eaton Vance Corp, El Paso Electric, eLong, EnergySolutions, Equity One and Express scripts.
Famous Dave’s of America, FBR Capital Markets, FGX Int’l, First Potomac Realty Trust, FirstService, Five Star Quality Care, Flowserve Corp, Fluor Corp, Frontier Communications Corp, General Maritime Corp, Genesis Energy LP, Gibraltar Industries, Gladstone Coml Corp, Golden Star Resources Ltd, Goodrich Petroleum, Gra nite Construction, Greif Brothers and Grupo TMM, S.A.
Hearst-Argyle Television, Henkel, HickoryTech, ICT Group, Integrys Energy Group, Interface, Internet Capital Group, Isis Pharmaceuticals, ITC Holdings Corp, J.M. Smucker Co, KBR, Lexington Realty Trust, Liberty Media Corp, Lodgian and LTC Properties.
ManTech Int’l Corp, Martha Stewart Living Omnimedia, McGrath Rentcorp, Medarex, MedAssets, Mediacom Communications Corp, Medicis, Metropolitan Health, MHI Hospitality Corp, Nektar Therapeutics, NetEase.com, Nicor, Northwest Pipe Co and NuVasive.
Onvia.com, Orchids Paper Products Co Del, Pennsylvania Real Estate Investment Trust, Perini Corp, Petrohawk Energy Corp, Petsec Energy Ltd, PharmaNet Development Group, Plains Exploration, Pointer Telocation Ltd, Polypore Int’l, Portland General Electric Co, Pozen and Psychiatric Solutions.
Quaker Chemical Corp, Quicksilver Gas Services LP, Quicksilver Resources, Quidel Corp, Ready Mix, Reliv Int ’l, RR Donnelley, RSC Holdings, Saks, Salesforce.com, Savient Pharmaceuticals, Service Corporation Int’l, SJW, SPX, Steiner Leisure, Stoneridge and Synovis Life Technologies.
Tandy Leather Factory, Targa Resources Partners LP, Teleflex, Telstra Corp, Ltd, Tenaris S.A., The TJX Companies, The Washington Post Co, Tomkins PLC, Toronto Dominion Bank, Turkcell Iletisim Hizmetleri A.S., Tween Brands, Tyler Technologies, Unibanco-Uniao de Bancos Brasileiros S.A., United Rentals, USEC, Virgin Media, Visteon Corp, and Zale Corp.
In terms of economic reports, the January Existing Home Sales (the consensus expects 0.2%), the MBA Mortgage Application Refinance Index, and the U.S. Energy Dept. Oil Inventories for Feb. 20 are due.
Early reports show that UK retail sales have been much stronger than expected. Japanese stocks rebounded with a 2.7% rally.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.