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Monday Morning Outlook: Stocks Struggle as Investors Await Fed Rate Cut

S&P 500 Index (SPX) Slips Below Key Support as Citigroup (C) Announces More Write-Downs

by Todd J. Salamone 1/22/2008 6:55 AM

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Another round of heavy losses rocked the market last week, as stocks were weighed down by a combination of weak earnings, evidence of slowing economic growth, and a Fed that refuses to act. By the close of Friday, the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite (COMP) had both shed roughly four percent, while the S&P 500 Index (SPX) tripped 5.4 percent lower and the small-cap Russell 2000 Index (RUT) lost 4.5 percent.

As we look back at the events that conspired to pull stocks lowe, we find a series of weak earnings reports from the financial sector. Citigroup led the pullback as it suffered a wider-than-expected fourth-quarter loss of $1.99 per share, while revenue plunged 70 percent. What's more, the large-cap bank wrote down $18.1 billion during the quarter. Citigroup wasn't alone with its negative news, as J.P. Morgan Chase missed earnings expectations and wrote down $1.3 billion during the previous quarter.

However, weakness on the earnings front wasn't limited to the financial sector. Tech bellwether Intel reported earnings that fell short of expectations and also warned that first-quarter results would come in at the low end of its projections. These weaker-than-expected earnings would seem to indicate that while the tech sector had previously benefited from its immunity to the subprime woes, the tech group is now beginning to suffered under the weight of the broad-market slowdown. Furthermore, earnings estimates remain high for tech, leaving it vulnerable to additional losses.

Meanwhile, the latest economic reports did little to boost the market. The housing market continues to slump, and is showing no evidence of putting in a bottom. In December, new home construction plunged 14 percent, slowing to its weakest pace in more than 16 years. Elsewhere, both the Producer Price Index (PPI) and the Consumer Price Index (CPI) came in roughly as expected by economists, benefiting from a drop in energy prices last month. However, the Fed has already stated that its main concern is not controlling inflation, but the slowing of economic growth, which is spreading across the nation. Both the Philly Fed and the Empire State indices revealed slowing growth in those regions. In fact, the Fed's Beige Book showed that only five of the 12 regions experienced modest growth during the latest reporting period. Finally, retail sales dropped 0.4 percent in December, suffering their first decline in six months.

Yet, as stocks continue to plunge below long-term support levels (a source of major concern) and the bond market continues to discount aggressive cuts in the Fed Funds rate, Ben Bernanke's helicopter remains grounded. His words suggest the Fed will do what needs to be done, but his actions (or lack thereof) continue to suggest inflation and a weaker dollar are a worry. Therefore, we continue to see the Fed as a major wild card here. Aggressive rate cuts are needed sooner rather than later, especially with S&P futures indicated significantly lower as of Monday afternoon and the yield on the two-year note sitting at 2.34 percent as of Friday's close. And if the market doesn't get these aggressive rate cuts, unfortunately, we can expect to see more the same.

As I alluded to above, the major market indices have broken below several key support levels. The Dow Jones has shed nearly nine percent since the start of 2008 and has closed the past two weeks below key support at its 80-week moving average. Furthermore, the Dow has fallen below its 20-month trendline. It has not closed below this trendline since June 2005. However, the Dow is holding above the 12,000 level � a key round-number level that could act as the next layer of support. In addition, the Dow is just above its 2007 low of 11,939, while the 11,750 region is the site of its January 2000 peak. These levels could serve as support for the Dow.

So far, 2008 has seen the SPX retreat 9.8 percent to tag a new annual low, leaving the index poised to finish January below its 20-month trendline for the first time since May 2003. During the past three weeks, the SPX has closed below its 80-week trendline. What's more, the SPX has hit a new low that is lower than the previous year's low of 1,363.98, which is a rare occurrence. In fact, since 1953, this feat has occurred only 12 times. Out of those 12 occurrences, the SPX has been higher 250 days later 66 percent of the time, averaging a gain of 9.2 percent.

Overall, the sharpest losses have been suffered by the COMP, which is down 11.8 percent since the start of the year, and the RUT, which has shed 12.1 percent. The Nasdaq has also fallen below its 20-month moving average while the RUT closed below its 2006 low. The next layer of potential support for the RUT is 650, which is the site of its 60-month moving average, or the equivalent of a five-year moving average. The 650 level was also an intermediate-term peak in January 2005. But an even more important potential area of support is the round 600 level, site of the index's 80-month moving average and its March 2000 and 2004 calendar year peak.

Should the market finally receive the interest-rate cuts it is looking for from the Fed, the upside for the various indices is littered with some hefty resistance levels. The Dow Jones now has to conquer the 12,800 level, which not only marked its February 2007 closing high, but the area also served as support in the pullbacks that occurred in August and November. Meanwhile, the SPX is facing potential resistance at the 1,380 level, which served as support in 2007. Finally, the RUT is faced with staunch round-number resistance at the 700 level.

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Monday Morning Outlook: Taking Another Run At 1,100 on the SPX

(11/14/2009 12:47:34 PM)

The bulls proved their resilience last week. The Dow Jones Industrial Average (DJIA) gained a solid 2.5 % on the week, despite a mixed bag of earnings and economic news. Todd Salamone, Senior Vice President of Research, examines the September-November price action to date and finds an eerie replay of the May-July period. Todd also notes the stubborn resistance at the 1,100 level on the S&P 500 Index (SPX). Next, Senior Quantitative Analyst Rocky White notes the underperformance of small-cap stocks in the recent rally, and examines the relative strength of the Russell 2000 Index (RUT) vs. the DJIA. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

read more...

Monday Morning Outlook: Dow Reclaims 10,000

(11/7/2009 3:24:11 PM)

A 200-point rally on Thursday brought the Dow Jones Industrial Average (DJIA) back above 10,000, a level it has been flirting with since mid-October. It had every reason to tank on Friday, when unemployment figures came in worse than unexpected. Instead, the Dow held. Todd Salamone, Senior Vice President of Research, examines several technical and sentiment indicators, including the performance of the CBOE Market Volatility Index, that help explain why the market held support last week. Next, Senior Quantitative Analyst Rocky White takes a look at November seasonality for the SPX during the past 30 years, and discovers that this once tried-and-true period of positive returns isn't quite as dependable as it once was. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

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Monday Morning Outlook: Long-Term Uptrend Intact, But Risks Lie Ahead

(10/31/2009 2:22:07 PM)

The Dow Jones Industrial Average (DJIA) once again played tag with the 10,000 mark last week, but headed sharply lower as the weekend drew nearer. Still, the Dow did manage to outperform its major counterparts for October, carving out a gain of 0.01% versus the S&P 500 Index's (SPX) loss of 2% and the Nasdaq Composite's (COMP) drop of 3.6%. The market remains rife with concerns, and Todd Salamone, Senior Vice President of Research, zeroes in on several of these potential hurdles in this week's commentary. In addition, Todd takes a closer look at put/call ratios for the SPX and the CBOE Market Volatility Index's (VIX) massive spike to close out the week. Next, Senior Quantitative Analyst Rocky White takes a look at the U.S. dollar, the massive amount of skepticism that has been directed toward the greenback lately, and the potential impact of this sentiment reading. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

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Monday Morning Outlook: Earnings Picture Is Rosy, but 10,000 Proves a Battle

(10/24/2009 12:25:12 PM)

The Dow Jones Industrial Average (DJIA) closed at 9,995.91 on Friday, Oct. 16, tantalizingly close to the 10,000 mark it temporarily conquered earlier in the week. Last week, earnings was the name of the game on Wall Street, and most companies acquitted themselves pretty well. How did the market react? It backpedaled, finishing Friday at 9,972.18, less than 30 points from the millennial mark. Todd Salamone, Senior Vice President of Research, revisits his discussion of the prior week, in which he forecast the likelihood of some short-term speed bumps. He sees continued churning in the weeks ahead. Todd also recommends your attention to Bernie Schaeffer's SENTIMENT magazine. Next, Senior Quantitative Analyst Rocky White takes a look at the Moving Average Convergence Divergence, a long-term market indicator better known as the MACD. Rocky finds that MACD is flashing a strong buy signal. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

read more...

Monday Morning Outlook: Dow Tags 10,000, and Technicians See Speed Bumps Ahead

(10/17/2009 1:14:35 PM)

Well, the bulls couldn't make it stick, but even so, didn't it feel a whole lot better going up than it did going down? A year after plunging through the 10,000 mark in the midst of a financial, banking and credit crisis, and seven months after bottoming at 6,547.05 on March 9, the Dow Jones Industrial Average (DJIA) regained the millennial milestone. Although it couldn't maintain that perch by the week's close, the week still went into the "W" column, and 10,000 was just a sniff away. Todd Salamone, Senior Vice President of Research, sees this rally continuing, but focuses his technical analysis on a few short-term speed bumps that could materialize within the longer-term uptrend. Next, the coming week begins a five-week expiration cycle, and Senior Quantitative Analyst Rocky White takes a look at why these weeks are often been bearish -- with the notable exception of the most recent occurrence in July. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

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Monday Morning Outlook: Rally Continues in Face of Broad Skepticism

(10/10/2009 1:52:05 PM)

Driven by another solid round of economic data and a surprise quarterly profit from Alcoa Inc. (AA), the bulls stampeded back onto Wall Street last week. Well-rested from their two-week hiatus, bullish investors found renewed hope for the global economic recovery in better-than-expected manufacturing and sales data, as well as an interest-rate hike from the Land Down Under. While earnings are all the rage on the Street, next week is expiration week, and Todd Salamone, Senior Vice President of Research, revisits this volatile topic and its potential implications for the week ahead. Todd also examines the bearish tone in a lot of recent financial commentary. Lest we forget about earnings, Senior Quantitative Analyst Rocky White takes a closer look at Alcoa as the starting gun to earnings season, and whether the pace the aluminum giant sets has any impact on the rest of the market. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

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Monday Morning Outlook: A Strong Month, A Strong Quarter, And Then A Slowdown

(10/3/2009 4:45:43 PM)

Despite posting back-to-back weekly losses, Wall Street still finished September and the third quarter with solid gains. In fact, the S&P 500 Index (SPX) logged its seventh consecutive monthly gain. Still, the tone on the economic front was somewhat somber last week, as traders confronted weaker-than-expected data on the manufacturing and the jobs fronts. Looking for a leg up on the coming week, Todd Salamone, Senior Vice President of Research, revisits key levels for the CBOE Market Volatility Index (VIX) and the SPX, while examining the possibility of a sharper pullback due to three potential risks to the bullish case. Then, Senior Quantitative Analyst Rocky White takes a closer look at the SPX's seven-month winning streak, similar historical occurrences, and the potential implications for the current market environment. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

read more...

Monday Morning Outlook: Despite Long-Term Uptrend, Bearish Sentiment Prevails

(9/26/2009 3:45:20 PM)

Housing data, the Federal Open Market Committee (FOMC), and the Group of 20, oh my! Last week's data deluge nearly sent the Dow Jones Industrial Average (DJIA) careening into the 10,000 level for the first time since Oct. 7, 2008, but the bulls quickly ran out of steam following the FOMC's policy statement. As a result, the DJIA peaked less than 100 points shy of 10K on Wednesday, and spent the rest of the week careening lower. Looking for a leg up on the coming week, Todd Salamone, Senior Vice President of Research, reviews key sentiment indicators, including the CBOE Market Volatility Index (VIX) and the 20-day historical volatility for the S&P 500 Index (SPX). Todd zeroes in on key support and resistance levels for the SPX and the Russell 2000 Index (RUT), offering levels to keep an eye on heading into next week. Then, Senior Quantitative Analyst Rocky White drills down on historical data concerning fourth-quarter seasonality for the Dow, revealing that Santa Claus may yet be paying a visit to Wall Street. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

read more...

Monday Morning Outlook: Bulls Remain Firmly in Command

(9/19/2009 12:20:55 PM)

Solid economic reports and testimonials by Federal Reserve Chairman Ben Bernanke and President Barack Obama provided plenty of fuel for Wall Street bulls last week. Obama used the anniversary of the Lehman Brothers collapse to stump for tighter regulations on the financial sector, while Bernanke all but declared the "all clear" on the U.S. recession. As a result, all three of the major U.S. indexes soared more than 2% for the week. Looking ahead, Todd Salamone, Senior Vice President of Research, reviews important levels on the S&P 500 Index (SPX) and the Russell 2000 Index (RUT), and takes a look at what to expect in the week following quadruple-witching expiration. Todd also examines why the sentiment backdrop could support higher prices. Then, Senior Quantitative Analyst Rocky White takes a closer look at the supposed increase in volatility during quadruple-witching expiration weeks and comes to a surprising conclusion, including why Monday could be a rather rough trading session. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.

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Monday Morning Outlook: A Definite Uptrend, But Speed Bumps Ahead

(9/12/2009 3:16:16 PM)

Improving economic data was once again the center of attention last week, and Wall Street bulls seized the opportunity to send stocks steadily higher throughout the week. Even China got in on the act late in the week, while merger and acquisition activity also boosted investor sentiment, allowing the Dow Jones Industrial Average (DJIA) to chalk up its seventh win in nine weeks. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, examines the effect of triple witching and looks at some key resistance levels in some of the major indexes. He concludes that these are "speed bumps" rather than warning flags. Then, Senior Quantitative Analyst Rocky White takes a closer look at the practice of "window dressing" and whether the buying of outperforming stocks and the selling of underperforming issues during the last two weeks of a quarter has had any impact on the market in 2009. We wrap up with a look at some key economic and earnings reports slated for release this week.

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Dissecting The Sectors
Sector
Chemicals Bullish
Outlook:The chemical sector remain an appealing bullish bet amid the current market turmoil. While the S&P Chemicals Index (CEX) has pulled back with the broad market, it is still above its rising 20-month moving average. The index has not closed below this trendline since July 2006. However, investor sentiment remains skeptical. Specifically, just over 50% of the analysts following the sector rate it a "buy" or better, leaving room for future upgrades. An unwinding of this bearish sentiment should help to extend the chemical sector's uptrend. We especially favor names in the fertilizer niche, such as Monsanto (MON), Archer-Daniels Midland (ADM), and Mosaic (MOS).

Sector
Gold and Metals Bullish
Outlook:The commodities group - outperforming for the past several months - has shined in recent sessions as investors head to the safe havens of gold, oil, and other commodities. Gold tagged a fresh multi-year high last week as it broke above the $900 level. There are still signs of skepticism surrounding commodities stocks, however. For example, 43% of all analysts' ratings on precious-metals stocks are "holds," and 6.6% are "sells," leaving some room for upgrades. As this pessimism begins to unwind, additional buying power could emerge to lift some stocks in the sector. Some of our favorite individual names include Freeport-McMoRan (FCX), Barrick Gold (ABX), and Agnico-Eagle Mines (AEM), in addition to the StreetTRACKS Gold Trust (GLD) exchange-traded fund. The GLD is fresh from a new all-time high and a successful test of support from its 10-day moving average.
Sector
Financials Bearish
Outlook: Financials continue to be a huge drag on the market as a whole, yet investors and analysts continue to grasp for a bottom even while additional write-down news is releases. The Select Sector SPDR Financial Fund (XLF) has been drifting lower since last June, guided by its 20-week moving average, and is trading near 4-year lows. This month, the fund has stumbled farther beneath its 80-month moving averages. Despite this negative technical and fundamental backdrop, composite Schaeffer's put/call open interest ratio (SOIR) readings on the brokerage and banking sectors reveal continued complacency. It also does not appear that investors are capitulating on their financial-sector holdings; the financial group is not currently a wise choice for the bullish side.

Monday Morning Outlook: Stocks Struggle as Investors Await Fed Rate Cut

S&P 500 Index (SPX) Slips Below Key Support as Citigroup (C) Announces More Write-Downs

by Todd J. Salamone 1/22/2008 6:55 AM

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