The Past Week: DOW Conquers 1300!
Dow & SPX Move Above Critical Levels!
Euro Zone News Defeats Sluggish GDP Report!
by Ian Harvey
July 30, 2012
The markets finally broke free of their recent trading range -- the SPX cleared its hurdle near the 1,380 area, while the Dow shot above the round-number 13,000 level. Both respective indices have taken out their previous June and July peaks, which is a good sign for the market as July comes to a close.
Stocks ended the past week with strong gains, after starting the week gripped by worries that the Spanish sovereign would need a bailout, and by association Italy might as well. Risk assets sold off, and investors ran to the safety of bunds and Treasurys, sending yields to record lows across the curve. Also, at the same time yields on Spanish debt shot higher, with the five year surpassing the 10-year, which is a sign of stress.
But Draghi turned the tide Thursday with a comments that the ECB stood ready to do whatever it takes to support the euro, and that the ECB’s action would be enough. On Friday, German Chancellor Angela Merkel and French President Francois Hollande, in a joint, communiqué, said they too were prepared to support the euro.
Reports that Draghi was speaking to ECB council members about taking action helped spur an even bigger rally Friday afternoon. There were also reports that Treasury Secretary Timothy Geithner is expected to meet with Draghi Monday, giving traders more confidence that some actions are being planned.
• The Dow Jones Industrial Average (DJIA) soared up 253.09 points this week, or 1.97 percent, to close at 13,075.66, crossing the psychologically-important 13,000 level for the first time since early May.
The Dow, in the past week, marked its loftiest daily close since May 3, jumping 187.7 points, or 1.5% on Friday, with all 30 blue chips climbing higher -- Merck & Co., Inc.'s (NYSE:MRK) earnings-related 4% rise leading the charge.
• The Standard & Poor's 500 Index (SPX) rallied 23.31 points last week, or 1.71 percent, to finish at 1,385.97.
The S&P 500 Index also ended at its highest point since May 3 in the past week.
• The Nasdaq Composite Index (COMP) jumped 32.79 points last week, or 1.12 percent, to end at 2,958.09.
On Friday, the Nasdaq turned in the best performance of its fellow benchmarks, soaring 64.8 points, or 2.2%.
The CBOE Market Volatility Index (VIX), widely considered the best gauge of fear in the market, suffered its third straight pullback on Friday, lopping off 4.7% and closing just atop its daily low of 16.52. The VIX was still able to notch a 2.6% win for the week.
TOP OPTIONS TRADES SINCE JUNE 01, 2012
|HLF July 47.50 Calls||53%||APPL Aug 650 Calls||67%|
|DLTR Aug 110 Calls||32%||UIS Oct 17 Calls||79%|
|HSY Aug 70 Calls||56%||TSO Nov 25 Calls||54%|
|NKE Oct 92.50 Calls||49%||HLF July 47.50 Calls (again)||38%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
Energy in the Past Week
The weekly analysis on the Select Sector SPDR Energy (XLE) improved last week, suggesting that a major low may be in place. There is still strong resistance in the $72 to $74 area and the downtrend (line a).
The weekly relative performance or rs analysis has moved back above its WMA, with further resistance at the downtrend (line b). It is also quite positive that the weekly OBV has moved through its long-term downtrend (line c) that goes back to early 2011.
Crude Oil in the Past Week
The September crude-oil contract bounced off the 20-day EMA last week, but still closed the week lower. There is support now at $86.80 to $87.50, which if broken would weaken the outlook. There is next resistance at $92 to $93.25.
Precious Metals in the Past Week
The SPDR Gold Trust (GLD) put in a strong performance last week, gaining 2.8%. The daily chart shows the early July highs have been overcome. A close above the June high at $159.20 would be even more bullish.
As I discussed early in the month, there was a high degree of negative sentiment, and gold has a seasonal tendency to bottom in July.
The daily on-balance volume (OBV) is just below its initial resistance (line d). It would take a move above this resistance and further improvement in the weekly OBV to confirm that a low is in place.
There may be a pullback to the rising 20-day EMA, currently at $154.37 this week.
Bonds in the Past Week
Bond yields rose Friday, with the 10-year yield at 1.54 percent late in the day. It touched a low of 1.37 percent earlier in the week -- probably an in-range corrective sell off. There is little in the way of tone change to effect bond movements -- the Fed is not likely to announce QE3, but the markets will be very disappointed if there’s no action from European central bankers.
Earnings in the Past Week
The rally came at the end of the week that saw some major earnings disappointments, including from Wall Street favorite Apple, as well as Facebook, Exxon Mobil, DuPont and dozens of others.
So far, 290 of the S&P 500 firms have reported results, with 67 percent beating earnings expectations and 22 percent posting below forecasts. In addition, 60 percent of companies missed revenue estimates, according to data from Thomson Reuters.
Among earnings in the past week, Facebook (FB) pared some losses but was still down more than 10 percent after the social-networking giant posted a slowdown in revenue growth and gave no guidance, causing investors to worry over the future growth. In addition, at least four brokerages slashed their price targets on the company.
Oil giant Chevron (CVX) topped earnings expectations, but revenue was lighter than expected.
Merck (MRK) reported better-than-expected quarterly earnings despite the negative impact of the stronger dollar, with solid sales growth from its vaccines and treatments for diabetes and HIV. S&P Capital IQ raised its price target on the Dow component to $49 from $46.
Starbucks (SBUX) fell after the coffeehouse giant missed earnings estimates and slashed its current-quarter outlook, citing global economic weakness. The company's disappointing news follows a string of other weak results chain restaurants including Chipotle (CMG) and McDonald's (MCD) in recent weeks.
Expedia (EXPE) surged more than 20 percent to lead the S&P 500 gainers after the travel website topped quarterly results, thanks to stronger worldwide hotel revenue.
Economic News in the Past Week
The economic news in the past week week was mixed. While new home sales were much weaker than expected, the pending home sales last Thursday were not nearly as bad. Then we got the initial reading on second-quarter GDP on Friday, which showed 1.5% growth, slightly better than the 1.3% growth that most expected, although it still showed sluggish growth.
The stock market seemed to ignore the data that indicated it was the lack of consumer spending that was holding the economy back. Exports were fairly strong at 5.5%, and of course will improve much more if the dollar weakens.
On the economic front, consumer sentiment came in slightly better than expected in July, according to the Thomson Reuters/University of Michigan's final reading. Still, the level hit its lowest this year.
And GDP expanded at a 1.5 percent annual rate in the second quarter, according to the Commerce Department said on Friday. Still, the reading marked the weakest pace of growth since the third quarter of last year.
The Major ETFs in the Past Week
What started as a negative week for the major stock indexes ended with in bullish style. July 26 and 27 saw a push higher in the index Exchange-Traded Funds, with the S&P 500 SPDRS (ARCA: SPY) and the Dow Jones Industrial Average SPDR (ARCA: DIA) pushing at resistance once again. The late week surge higher keeps the short-term (June and July) uptrend intact for these ETFs. Not all of the major index ETFs are confirming though. PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, and Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, are not close to resistance, and therefore will not be making new short-term highs.
Volume also continues to be an element of concern. Indicators such as on-balance volume show declining interest in this rally, indicating it is more likely a bear market rally as opposed to the next wave higher in a longer term bull market.