Market Analysis – Few More Up Days Likely Before Pullback

 

Caution surrounding anticipation of Q3 earnings and a revenue miss by Johnson & Johnson (JNJ), as well as the Senate Finance Committee’s approval of a health care reform bill, conspired to end the S&P 500′s (SPX) six-day winning streak. But, even so, the market showed impressive resilience as it rallied in the late afternoon, wiping out the big losses of the morning.

The financial sector was weak yesterday following several days of gains. The poor showing was attributed to analyst Meredith Whitney’s downgrade of Goldman Sachs (GS) to “neutral” from “buy.” Goldman closed off 1.54%. 

CIT Group (CIT) fell more than 11% following the resignation of its CEO.

On the Dow Jones Industrial Average (DJI), every financial stock in the index registered a loss, with American Express (AXP) off 0.68%, Bank of America (BAC) down 1.22%, and Travelers (TRV) off 1.66%.

At the close, the Dow was off 15 points to 9,871, the S&P 500 fell 3 points to 1,073, and the Nasdaq (NASD) gained a point to 2,140. 

The NYSE traded 1.1 billion shares with decliners outpacing advancers by about 4-to-3. On the Nasdaq, decliners were slightly ahead of advancers with 637 million shares traded.

November crude oil gained 88 cents, closing at $74.47 a barrel, and the Energy Select Sector SPDR (XLE) gained 9 cents to $57.01. 

December gold rose $7.50 to $1,065, another record high, on U.S. dollar weakness. The PHLX Gold/Silver Index (XAU) also made a new closing high at $179.47, for a gain of $3.20.

What the Markets Are Saying

At some time during each week, I like to pass on my evaluation of the various internal and sentiment indicators. I usually do this at a critical time in a trend, and since prices are nearing the top of the much-mentioned bull channel, let’s do that now. 

 

The internal indicators — chiefly the stochastic, Moving Average Convergence/Divergence (MACD), momentum and the Relative Strength Index (RSI) — are now in their overbought zones but not at levels considered excessive. Thus, they are telling us that even though the market is poking at its bullish resistance line, it is still slightly below it, and could have a couple more days of upside before sellers take over.

Meanwhile, our sentiment indicators — chiefly the CBOE Volatility Index (VIX), the American Association of Individual Investors (AAII) sentiment survey, and the insider reports, letter writers and other Investors Intelligence pieces — are saying the same, i.e., modestly but not excessively overbought. 

The various indicators and the charts are telling us that even though prices are close to new highs, we will most likely see several more sessions of buying before sellers reap profits. And new highs are likely before this round of buying is over.

Finally, one of my favorite technical sources, Dorsey Wright & Associates, had a terrific piece last night on natural gas futures versus the natural gas producers as measured by the price movements of two ETFs, the United States Natural Gas Fund (UNG) and the First Trust ISE-Revere Natural Gas Index Fund (FCG). (For more on FCG, see the Trade of the Day.) 

Usually natural gas and the producers move together, but this year natural gas continues in a bear market while natural gas-related companies are tearing into new highs after almost doubling from their March lows. What gives?

Dorsey points out that despite the discovery of new natural gas fields, “giving the world 60 years of supply,” and the expected decline in the prices of the futures contracts, technology has come to the rescue of the producers who were once dependent upon high natural gas prices to make a profit. Now they are in the driver’s seat.

You may want to check out “Energy crisis is postponed as new gas rescues the world” from the UK’s Telegraph and “Technology Has Ended the U.S. Energy Crisis” from Business Insider.

Today’s Trading Landscape

Earnings to be reported include: Abbott Laboratories, Acergy S.A., Adtran, AMR Corp., Amylin, AptarGroup, ASML Holdings N.V., Avocent Corp., Badger Meter, CIT Group, City Holding Co., Commerce BancShares, Crown Holdings, East West Bancorp, HDFC Bank Ltd., Host Hotels & Resorts, IMS Health, Landstar System, Lufkin Industries, MGIC Invest Corp., Navigant Consulting, Polycom, Porter Bancorp, Posco, Spartan Stores, Stanley Furniture Co., Teradyne, Virginia Commerce Bancorp, Votorantim Celulose e Papel S.A., W.W. Grainger, WD-40 Co., WesBanco, Xilinx and Zep.

Economic reports due: MBA purchase applications, retail sales (the consensus expects -2.1%), retail sales ex-autos (the consensus expects 0.3%), import and export prices, and business inventories (the consensus expects -0.9%).

Late news: Intel Corp. (INTC) reported Q3 earnings of 33 cents versus an estimated 27 cents. CSX Corp. (CSX) reported 74 cents versus an estimated 41 cents. JPMorgan Chase (JPM) reported 82 cents versus an estimated 52 cents.

Dell’s (DELL) CFO said that the company should have “no problem” meeting cost-cutting goals.  

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