Market Outlook
Monday, May 24th, 2010

Monday presents several economic reports. The schedule for today is:-

8:30 Chicago Fed National Activity Index

10:00 Existing Home Sales

Also, once again, there will several companies reporting their quarterly earnings:-

• Campbell Soup Company (CPB),

• Yingli Green Energy Hold. Co. Ltd. (YGE), and

• Phillips-Van Heusen Corp. (PVH).

It seems that the bears are on a roll again, as the market sell-off begins later this morning, indicated by Dow Jones Industrial Average (DJIA) trading about 94 points below fair value. Look for technical support near 10,100 and 10,000 for the Dow. As for the S&P 500 Index (SPX), futures on the broad-market indicator are pointing toward an opening dip of 12.4 points. The SPX should find support near 1,065 (the site of its May 6 “flash crash” lows), while resistance looms overhead near 1,095 and 1,100.

US stock futures for may 24, 2010

Stocks tumbled across the board last week, due to several factors combined with extreme volatility.

Just when it looked we were going to lose the critical 200-day average on Thursday, the bulls' returned to the fray and pushed the major indexes back into safe territory.

The market is currently at the bottom of its multi-week range, so this is the time to be bullish again if you think the range will remain in force. The S&P 500 Index actually touched its February 2010 low on Friday before rebounding, which will give all the range-traders a sign to buy.

If we considered the negative aspects affecting the market at the moment we would never invest in shares again. These being:-

• Disunity among European and U.S. financial leaders,

• Tightening credit in Australia and China,

• New protests due in Greece,

• A failed bond auction in Spain,

• The decline of business activity and stocks in Asia and Brazil,

• Widening efforts at financial regulatory reform in Washington,

• Lawsuits against major Wall Street firms.

• The lack of support among investors for solid earnings news in the past week,

• The pace of upward earnings revisions by analysts slowed.

• 15 of the past 19 sessions posted 100-plus point changes in the Dow Jones Industrials.

…………..just to name a few.

However, all is not lost. As I mentioned in Friday’s update, the 10% correction was a necessity.

Looking at the following chart will also give the bull’s a boost, showing a long “tail” on Friday’s daily bar - a condition that occurs when an index plunges in the morning, then rebounds and ends up -- is considered one of the most positive signs in the technical trader's handbook.

SPY daily chart-may 21, 2010

The turmoil in the markets has been quite essential to the welfare of the bulls as it presents a sign of increasing stability, as sectors and regions that got way out of line on the upside have come down in value as they reach toward their medians.

Looking at the following chart of the S&P 500 Index definitely provides hope for the bull’s recovery. Here we can see the S&P 500 Index is testing its 12-month average for the first time since crossing it in the middle of last year. This was a common occurrence in the 2003-2007rally, not a death-run. It is a pause in the upwards spiral, which refreshes the event, although at the time it seems to be another bear run starting. Note that in 2004, 2005 and 2006 the index actually fell well below the 12-month average mid-month before buyers pushed it back up.

SPX-may 20, 2010

Now that we've seen a period of extra-low volatility in March and April followed by a period of extra-high volatility in May, the next stretch is likely to feature more normal volatility.

Also, U.S. economy and stocks showed great relative strength in comparison to the rest of the world. It's hard to know whether this is a sustainable trend.

There are a few further points to the mornings trading which need to be considered:-

• Gold futures are trading higher in London this morning, rising $9 to $1,185.10 an ounce after plunging more than 4% last week.

• The U.S. Dollar Index is climbing higher again this morning, rising 1.19% to trade at 86.39.

• Heading into the open, the July contract for crude is down 23 cents at $69.81 per barrel. Strength in the U.S. dollar has been at least partly responsible for crude's decline.

Overseas Markets

Overseas trading is mixed this morning, as only about half of the foreign indexes are in positive territory. In Asia, most indexes rose, with the Chinese market's strong performance offering support to its peers in the region, but investors continued to keep a wary eye on the debt problems in the euro zone. Over the weekend in Europe, the Bank of Spain said it was taking over the running of Spanish savings bank CajaSur after its planned merger with another of the country's small lenders failed. That weighed on the euro already hurt by worries about the impact of deep public spending cuts in Greece, Spain and Portugal. European shares were mixed on Monday with gains capped as investors remained concerned the euro zone crisis could hurt global growth.

In Asia, Japan -0.3% to 9758.4. Hong Kong +0.6% to 19668. China +3.5% to 2673. India +0.1% to 16470.

In Europe, at midday, London -0.7%. Paris -0.6%. Frankfurt -1.5%.

Futures Trading

Heading into the open, futures on the DJIA and the SPX are trading roughly 94 points and 12.4 points below fair value, respectively.

Futures: Dow -1%. S&P -1.2%. Nasdaq -1.2%. Crude -0.3% to $69.86. Gold +0.8% to $1185.20.

Also several companies have announced their quarterly reports which seem to be supporting or surprising analysts’ predictions. These are:-

YGE- may 20, 2010

Yingli Green Energy Holding Co Ltd (YGE)

China-based solar panel maker Yingli Green Energy Holding Co Ltd (YGE) posted slightly higher-than-expected first-quarter earnings, helped by a steep jump in sales and profit margins.

Net income was $28 million, or 18 cents per share, compared with a year-earlier loss of $20.7 million, or 16 cents per share.

Excluding one-time items, earnings per share were 23 cents, slightly above the 22 cents analysts had forecast, according to Thomson Reuters I/B/E/S.

Quarterly revenue rose 59 percent to $358.9 million.

The company stuck to its forecast for full-year module sales between 950 megawatts and 1 gigawatt.

Yingli shares rose 1.4 percent to $9.70 in premarket trade.

CPB-may 21, 2010

Campbell Soup Co (CPB)

Campbell Soup Co (CPB) posted better-than-expected quarterly profit as increased promotional spending led to higher sales in its key U.S. soup market after two straight quarters of declines.

The world's largest soup maker also said on Monday that it expected full-year earnings to come in at the high end of its forecast.

Profit dipped to $168 million, or 49 cents a share, in the third quarter ended on May 2 from $174 million, or 49 cents a share, a year earlier.

Excluding one-time items, earnings were 54 cents a share, topping the analysts' average estimate of 51 cents, according to Thomson Reuters I/B/E/S.

Sales rose 6.9 percent to $1.80 billion, in line with the analysts' average estimate.

Sales in the key U.S. soup segment rose 2 percent. For the full year, Campbell said it expected sales growth of 2.5 percent to 3.5 percent and adjusted earnings per share growth at the high end of its 9 percent to 11 percent forecast.

Campbell has come under pressure for falling U.S. soup sales as shoppers sought out other "simple meals" like frozen foods.

Some Interesting News-

• Google (GOOG, Fortune 500) got the regulatory OK for its $750 million purchase of mobile advertising firm AdMob, following a six-month antitrust investigation. The Federal Trade Commission approved the deal since rival Apple (AAPL, Fortune 500) recently purchased a mobile advertising service, Quattro Wireless.

• The U.S. Justice Department has concluded its criminal probe into AIG and will not pursue charges against the insurer or its senior executives, according to published reports.The decision to end the two-year investigation was made after the Justice Department determined there wasn't enough evidence to bring criminal charges against AIG or its executives.Investigators were focusing on whether Cassano misled investors when he stated in 2007 that the insurer's portfolio of so-called credit default swaps would not produce significant losses.While the criminal investigation into the insurer has ended, AIG still is being scrutinized by the Securities and Exchange Commission.

• The National Association for Business Economics expects the U.S. economy to grow at an "above trend" rate in 2010 and 2011, with real GDP growth of 3.2% in both years. NABE's February forecast had been for 3.1% growth. In its May report, NABE also noted that "job growth is on a steady footing," and the unemployment rate will likely drop to 9.4% at the end of this year and 8.5% by the end of 2011.

• Banks have moved one step closer to potential credit-ratings downgrades with last week's Senate passage of the financial reform bill. Part of that legislation weakens the implied government safety net for banks, and if that feature is maintained in the joint House-Senate version of the bill, then rating companies have already warned major downgrades are likely in store. This could create billions of dollars in additional financing costs for some of the biggest banks, including Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and Goldman Sachs (GS).

• Six banks operating a 'dark pool' trading platform in Europe have agreed to start disclosing daily volumes amid increased regulatory scrutiny and a push for greater transparency. Market data company Markit will collect and verify the data, and then break out volume on a country-by-country basis. The six banks are Credit Suisse (CS), Deutsche Bank (DB), JPMorgan (JPM), Morgan Stanley (MS) and UBS (UBS).

• U.S. and Chinese officials met for their second Strategic and Economic Dialogue, where Geithner urged China to reduce trade barriers and said a yuan appreciation is in China's own interests. Chinese President Hu Jintao struck a conciliatory note, saying the two countries must work together to promote "full economic recovery," but avoided any specific commitments. "China will continue to steadily advance reform of the renminbi exchange rate formation mechanism following the principles of being independent, controllable and gradual," Hu said.

• Government officials lashed out at BP (BP) over the weekend, saying the company had missed "deadline after deadline" in its efforts to plug the Gulf of Mexico oil leak. In response to those failures, the White House created an independent national commission to study the spill and suggest ways to prevent future accidents. BP maintains it's cooperating with government officials and has already spent $760M on its spill response. However, it's containment efforts have had mixed success; a siphon tube inserted into the leak has collected an average of 2,010 barrels per day, far less than the amount of oil estimated to be leaking into the sea, and company executives said there's no certainty of success for a top-kill attempt that will begin late tomorrow.

• Market fears about the European debt crisis are providing an unexpected boon to U.S. home buyers. Just when the housing industry was braced for mortgage rates to rise, safe haven flows into the U.S. are pushing mortgage rates to the lowest levels of the year, back to nearly fifty-year lows. At 4.86% now, analysts suggest the rate could drop as low as 4.5% this summer, in contrast to the 6% economists has previously forecast.

• Royal Bank of Scotland (RBS) is nearing a deal to sell its European private equity fund portfolio to Alpinvest, the Dutch pension fund, for around €400M ($497M). A deal could be announced in the next few weeks. RBS is also in talks to sell its U.S. private equity fund portfolio for around $200M as it tries to shed non-core assets.

• Securities regulators in China have reportedly begun their review of Morgan Stanley's (MS) application to sell its roughly $1B stake in China International Capital Corp. [CICC]. If the review goes smoothly, Morgan could be allowed to sell its 34.3% stake within three months, paving the way for other joint ventures, including a possible investment with China Fortune Securities Co.

• Equity One (EQY) agreed to buy the U.S. unit of London-based Capital Shopping Centers Group in a $258.3M deal, helping Equity One expand into California. Excluding transaction expenses, Equity One also reaffirmed its 2010 guidance and expects funds from operations of $1.00-$1.08 per share.

• British Airways' (BAIRY.PK) cabin crew began a five-day strike today after negotiations fell apart over the weekend. The airline will operate a reduced schedule during the week, but the strike could impact other members of the Oneworld alliance, including American Airlines (AMR). Two more five-day strikes are planned to start on May 30 and June 5.

• Just one bank was closed on Friday, bringing this year's failures to 73 so far. The closure of Pinehurst Bank of St. Paul, Minn. is expected to cost the FDIC's insurance fund $6M.


The U.S. market remains in a primary uptrend, but it is being tested. Breadth data and historical relationships suggest that buyers ought to come back in a big way now, but their resolve in turn will be tested at the mid-May rally high, around 1,175 as the bears start flexing their claws again.

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Back to Stock Options Made Easy from Market Outlook - May 24, 2010

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