For the first time in nearly two weeks, volume actually returned to the equity markets today as positive earnings reports and upbeat commentary from the likes of Alcoa and CSX helped to bolster investor confidence in share prices. While far from a monster volume day, the 4.0 billion shares traded on the S&P 500 was a marked improvement from the readings of 3.0 billion shares or less that have been seen of late. Further stoking the positive earnings momentum, Intel reported better than expected earnings after the bell ($0.51/share) and actually raised its revenue guidance for the rest of the third quarter above what analysts were projecting. With equities in a good mood from the outset this morning, the spillover effects could be seen in nearly all 'risk-oriented' asset classes. Commodities, in particular, saw considerable buying on the day. Crude oil jumped over $2.00/barrel while gold closed about $15.00 higher. Even the Euro got into the act and rallied over $0.01 against the dollar.
Given the price action of late and knowing where the technical resistance points that are hanging over the S&P's, today's rally was not unexpected. However, as I noted in previous posts, punching through the 1,095 - 1,105 level will be a key hurdle the market will need to clear in order for this rally to maintain its legs. It is worth noting that despite the day's euphoria, the index was unable to break above the 1,100 level intra-day and only managed a close right at 1,095. This tells me that the market is ripe for a pause here and will subsequently need a descent catalyst to break on through. It's possible that Intel's report will serve as the impetus for this move (pre-market S&P futures are currently about 5.50 points above fair value, indicating a positive open is likely), but we're now looking at a market that has rallied for six straight sessions and will need to take a break at some point. However, volume has been picking up slightly during this move, so that's definitely concerning from the bear's perspective. While it's too early to say whether or not this rally will fizzle here, a momentary pause would be a welcome development and give everyone the time to assess whether or not the earnings we've seen are truly representative of what's to come.
After reviewing the earnings reports for both Alcoa and CSX, there's not a lot to get down on. Revenue growth has been positive, margins are holding in, and management's guidance has been largely positive (it's not really in the interest of a CEO to espouse doom and gloom in their earnings reports, so take this with a healthy dose of salt). Having only glanced through Intel's report, I can say that their report is just a rosy on the surface. As someone who is currently net short, this type of data is certainly cause for concern. Most surprising for me has been the level of optimism for upcoming quarters being espoused by management. With federal stimulus winding down and consumer sentiment at a fairly low level, you would think that the outlook for sales would be challenging at best. From what I can gather from the various management comments as well as the trade deficit report that was released this morning, Asian demand is continuing to drive the growth in demand that companies are seeing. Alcoa, CSX, and Intel are all companies with sizable exposure to the global marketplace and, therefore, should generate earnings that are highly reflective of the economic conditions being seen around the globe. Chinese demand, in particular, appears to remain robust.
However, the fact that the U.S. trade deficit expanded while exports grew at a fairly quick rate suggests that the American consumer may still be hanging in there. I'll be very curious to see if this trend continues over the coming months as I believe that today's numbers could have been skewed a bit by the expiration of the home buyer tax credit, which likely put a floor under import demand during the period. Furthermore, the dollar's relative strength over the past several months certainly gave consumers the additional purchasing power needed to up import demand. As this rally in the dollar has fizzled of late, a continued expansion of the trade deficit could mean that consumer demand is much more robust than many (myself included) anticipated. Definitely something worth keeping an eye on.
Looking ahead to tomorrow, the market's ability to continue the rally will say a lot about where we are headed in the near-term. I wouldn't be surprised to see the markets up early, but then pull back to near unchanged fairly quickly as the technical shorts come in. The story will largely be told at the close. The past two weeks have seen robust program and ETF trades coming in late in the day and moving things higher. Whether or not the shorts will have enough ammo to counteract this action, only time will tell. If a close above 1,105 materializes, I fully expect the market to run to the 1,130 shortly thereafter as there isn't much resistance along the way. A lower close tomorrow will likely signal a pause in the action until more fundamental (earnings) information comes out to help push things one direction or another. Typically, markets run up into earnings and sell off as the numbers are released. So far, the opposite has been the case. With major bellwethers like J.P. Morgan due to report later in the week, we should know fairly quickly whether or not the early reporters are truly telling the story or simply looking though rose colored glasses. For my part, I'm getting a little more concerned that this rally can continue for a while and will be looking to square my short position if things are headed for a higher close tomorrow. I'll think about getting short again around 1,030 if the fundamentals and market action allow.
I'll also be keeping an eye of the Treasury market for further confirmation of equity's rally. Yields have moved up across the board over the past two weeks, with the moves getting larger and larger with each passing day. This feels like the beginning of a reallocation trade among institutional investors as the perceived risk in the market has fallen. But with all the challenges that the global economy currently faces, it will only take another sovereign default scare or some other 'impossible' event to change this mentality overnight. Until then (if it comes at all), 'risk-on' appears to be the in-vogue trade. I'll stick to the safety of my largely cash-based, slightly net short position for now. Until tomorrow.....
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