The Stock Market Results for the Past Week - October 22, 2012

The Past Week: Tough Stock Market Sustaining Earnings Disappointments!

by Ian Harvey

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October 20, 2012

The slump is the worst since June and comes on the 25th anniversary of the 1987 crash. McDonald's and GE say the global economy is struggling. Microsoft, Google and Chipotle slide. Apple drops under $610. Oil and gold drop!

The stock market closed the past week with its biggest single-day point and percentage declines in four months, after weak corporate earnings reports, particularly the early release of Google (GOOG) earnings on Thursday, as well as the anniversary of the 1987 crash weighed on traders. It gave investors another reason not to buy. The major averages were lower for the week, and are now negative for the month.

Precious metals dropped Friday, and have been correcting steadily from the early October highs. The high level of bullish sentiment in the past week has made investors nervous, but the technical action suggests we may get a good buying opportunity by the end of the month.

The stock market earlier this past week flirted with 2012 highs, even as a number of major companies saw earnings or revenues—or both—fall short of estimates. But the tide turned Thursday as the stock market traded slightly lower while investors digested Google’s (GOOG) big earnings shortfall and its shares weighed on indexes.

And then, by Friday, a series of blue chips led the stock market lower, with misses by Dow stocks Microsoft (MSFT), General Electric (GE) and McDonald’s (MCD) smacking their stocks and taking the Dow sharply lower.

But strategists make a case that some of these stumbles are already in the price of stocks.

Going into the earnings season, analysts had expected the companies that had exposure to foreign currencies, China and Europe to be the most likely to misstep. The domestically oriented companies, the theory went, would be less inclined to miss because of a slightly stronger U.S. economy and an increasing willingness by American consumers to spend.

But McDonald’s profit pain also came from the U.S. The global fast food chain’s earnings fell about four percent, due to the stronger dollar’s impact on international result but also “broad competitive activity” in the U.S.

McDonald’s revenue in the U.S. in stores open 13 months grew by 1.2 percent while globally, restaurant revenue rose 1.9 percent, the slowest pace since 2003.

The earnings performance of financials, health care and staples has been the best.

But on a revenue basis, 82 percent of health care companies had negative surprises, while 83 percent of industrial companies had misses, and 67 percent of materials companies’ revenues came up short.

Friday also marked the 25th anniversary of Black Monday, when the U.S. stock market went into a free fall and the Dow lost 22.6 percent in a single trading session. The Black Monday stock-market plunge on Oct. 19, 1987, stunned investors and rattled Wall Street.

• The Dow Jones Industrial Average (DJI) eked out a gain of 0.11 percent for the past week.

For the Dow, Friday's slide marked its biggest loss since June 21 - with the sell-off coming on the 25th anniversary of Black Monday, when the Dow plunged 22.6 percent in its worst single-day percentage drop ever.

• The Standard & Poor's 500 Index (SPX) rose 0.32 percent for the past week.

• The Nasdaq Composite Index (COMP) hit by tech’s selloff, lost 1.3 percent for the week to 3005.

For the year, the Dow is up 9.2%, with the S&P 500 up 14% and the Nasdaq up 15.4%.

Travelers (TRV) was the best performer on the Dow for the week, while IBM (IBM) led the laggards.

The S&P tech sector was down 2.4 percent, while materials were the best performers, up 2.1 percent.

Materials companies were expected to perform poorly this quarter but expectations for the technology sector had not come down as much and many investors were more heavily invested in tech than other sectors. Therefore, the selling by disappointed investors has been dramatic. Since the S&P’s Sept. 14, 2012 high, tech has by far been the biggest laggard, losing 7.8 percent. Materials stocks were the second worse sector since then, down 2.9 percent, and energy was third -- down 2. 8 percent.

The Stock Market Ending October 19, 2012


The CBOE Market Volatility Index (VIX – 17.06) ), widely considered the best gauge of fear in the stock market, rose 13.5 percent to close at 17.06, conquering its 80-day moving average for just the second time since late June, but off its session high at 17.60. Options expiration added a bit of volatility to Friday's trading.


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Summary of the Stock Market in the Past Week

Monday, October 15

The stock market surged today with a solid and broad rally that saw the Dow Jones industrials (DJI) enjoy their best day in a month.

The stock market rally was built on a decent report on September retail sales, better-than-expected quarterly results from Citigroup (C) and, finally, Softbank's (SFTBY) deal to buy 70% of Sprint Nextel (S).

Adding some extra cheer to the stock market -- gains in health care stocks triggered in part by an Eli Lilly (LLY) report that a new gastric-cancer drug has produced good results and an analyst upgrade. In addition, inflation and trade data from China made investors more optimistic about the world's second-largest economy.

Manufacturing in New York contracted more than economists expected in September, according to the Federal Reserve Bank of New York's Empire State Manufacturing Survey.

The Dow closed up 95 points to 13,424; the blue chips had been up as many as 109 points just before the close. The Standard & Poor's 500 Index (SPX) gained 12 points to 1,440, and the Nasdaq Composite Index (COMP) rose 20 points to 3,064. The Dow's gain was its largest since a 207-point surge on Sept. 13. The gains for the S&P 500 and Nasdaq were their best since Sept. 27.

Tuesday, October 16

The stock market enjoyed its biggest rally in a month today, thanks to decent earnings from Goldman Sachs (GS), UnitedHealth Group (UNH) and Johnson & Johnson (JNJ).

At the same time, Vikram Pandit's resignation as CEO of Citigroup (C) startled many on Wall Street, especially as news reports suggested that his departure came as the result of conflict with his board over pay and strategic issues. Michael Corbat, who had been Citigroup's CEO for Europe, the Middle East and Africa, was named the new CEO. Citigroup shares were up 59 cents to $37.25, not far from their 52-week high of $38.40.

After the close, shares of both IBM (IBM) and Intel (INTC) moved lower as the initial take on earnings reports disappointed.

Futures trading suggests a modestly lower open on Wednesday. Trading in Standard & Poor's 500 Index (SPX) futures appeared to dip during the debate between President Barack Obama and former Massachusetts Gov. Mitt Romney. Trading on Intrade, the Irish web site that lets investors speculate on possible election outcomes, saw prices rise on the odds Obama will reelection -- suggesting traders, at least, thought the president came out on top in the clash.

The Dow Jones industrials (DJI) closed up 128 points to 13,552; the blue chips had been up as many as 132 points in the early afternoon. The S&P 500 was up 15 points to 1,455, and the Nasdaq Composite Index (COMP) gained 37 points to 3,101. The Dow's gain was its third straight and biggest since Sept. 13. The gains for the S&P 500 and Nasdaq were their second in a row.

Wednesday, October 17

This was one of those days when one stock -- IBM (IBM) -- made the stock market look worse than it actually was.

The major averages did, in fact, finish higher today, thanks to gains for housing, financial and biotech stocks. Housing starts hit a four-year high in September. Building permits also jumped, suggesting building should be solid in the months ahead.

Because of the report, homebuilding stocks surged. So did such housing-related stocks as Home Depot (HD ), Lowe's (LOW), Caterpillar (CAT), La-Z-Boy (LZB), Whirlpool (WHR) and Bed Bath & Beyond (BBBY) rallied nicely.

The Dow Jones industrials (DJI) finished up a modest 5 points to 13,557. IBM was down $10.37 to $200.63 after a disappointing earnings report. Had IBM and Intel (INTC), which also disappointed, simply finished flat on the day, the blue chips would have been up 90 points. IBM's decline subtracted nearly 80 points from the Dow. Intel subtracted an additional 4 points from the index.

The Dow's gain was its fourth in a row and brought the index within 40 points of its 2012 closing high of 13,596.93, set on Sept. 20. Meanwhile, the Standard & Poor's 500 Index (SPX) was up 6 points to 1,461, about 5 points below its 2012 closing high of 1,466. The Nasdaq Composite Index (COMP) was up 3 points to 3,104.

Thursday, October 18

Tech stocks took a dive today after earnings from Internet search giant Google (GOOG) were released early -- and disappointed investors.

Google shares slumped $68.10 to $687.39 before trading was halted and closed down $60.49 to $695. (Trading resumed at 3:20 p.m. ET.) Earnings of $9.03 a share (after one-time charges) missed the Street estimate by $1.62 and were down from $9.72 a year ago. Revenue of $11.33 billion, up 45% from a year ago, nonetheless missed the consensus estimate of $11.86 billion.

Google's miss was so bad that CEO Larry Page, his voice sounding strained, began the company's conference call by apologizing for the "scramble" in the afternoon. The scramble pulled shares of Facebook (FB), Yelp (YELP), Groupon (GRPN) and Zynga (ZNGA) lower. Tech shares were already weak because of a decline in shares of Apple (AAPL).

Microsoft (MSFT) was lower in regular trading and fell further after hours after its fiscal-first-quarter earnings were released. Shares of Chipotle Mexican Grill (CMG) fell more than 10% after hours as results disappointed investors.

The damage from Google was largely confined to tech land. The Nasdaq Composite Index (COMP) closed down 31 points to 3,073. The Nasdaq-100 Index (NDX) tumbled 31 points to 2,744. Both moved up from lows when Google trading resumed. But the Dow Jones industrials (DJI) were off just 8 points to 13,549. Right after the Google news, the blue chips had been down as many as 31 points. The Standard & Poor's 500 Index (SPX) fell 4 points to 1,457. Google is an S&P 500 component, but isn't in the Dow.

Friday, October 19

The stock market suffered its worst one-day loss in about four months today as earnings from some of the biggest companies missed estimates, particularly on revenue, because of slowing economies at home and abroad.

The slump came on the 25th anniversary of the 1987 market crash that saw the Dow Jones industrials (DJI) fall 508 points, or 23%, in a single day.

While today's stock market slump was painful, it was nothing like 1987. The Dow fell 205 points in its worst loss since June 21. Earnings from McDonald's (MCD) and General Electric (GE) today and Microsoft (MSFT), Thursday disappointed investors. In addition, Google (GOOG) was lower again after third-quarter results proved disappointing, and Chipotle Mexican Grill (CMG) shares were crushed, falling $42.93 to $243, because of slowing sales growth.

There was some cheer from the housing industry. The National Association of Realtors reported a small decline in existing-home sales in September, but prices were higher and inventories were shrinking.

The Dow finished at 13,344; the blue chips had been down as many as 237 points. The Standard & Poor's 500 Index (SPX) dropped 24 points to 1,433. The Nasdaq Composite Index (COMP) fell 67 points to 3,006. The S&P 500 and Nasdaq also suffered their largest losses since June 21. The indexes were lower for the second day in a row; the Nasdaq's two-day loss of nearly 99 points was its worst since May 4.


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Sector Performance in the Stock Market

The iShares Dow Jones Transportation (IYT) rallied early last week, but gave up the gains by the end of the week, closing a bit lower.

Transports are still badly lagging the Dow Industrials, and the warning from early September now seems to be more important. The longer a divergence continues the more validity it tends to have.

Friday was a tough one for all the sectors, as the Select Sector SPDR Technology (XLK), Select Sector SPDR Consumer Staples (XLY), Select Sector SPDR Materials (XLB), and Select Sector SPDR Health Care (XLV) all had close to 2% declines.

Even the normally defensive Select Sector SPDR Consumer Staples (XLY)and Select Sector SPDR Utilities (XLU) were down almost 1%.

The extent of any follow–through selling in the Select Sector SPDR Materials (XLB) will be especially important, as its relative performance analysis that was discussed in last week’s ’Stock Market Results’ had just turned positive.

Sector selection plays an important part in your investment success, and this is demonstrated by the yearly performance chart (excluding dividends) of these three Fidelity funds.

The Fidelity Select Biotechnology Fund (FBIOX) has been the star performer, especially when compared to the Fidelity Select Energy (FSESX). As of earlier in the week, FBIOX was up 42.5% including dividends.


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Crude Oil and the Stock Market

The December crude–oil contract was flat for most of the week, but then dropped over $2 per barrel on Friday to close on the week’s lows. It is still $3 above the key 61.8% support level at $87.40, but the chart has turned more negative.

The national average retail price of gasoline was $3.715, according to AAA's Daily Fuel Gauge report. That was off 2.2 cents from Thursday and down 9.5 cents, or 2.5% from a week ago.

Precious Metals

The SPDR Gold Trust (GLD), iShares Gold Trust (IAU), iShares Silver Trust (SLV), and Global X Silver Miners (SIL) all were all hit last week. This was consistent with the daily sell signals but as I discussed in detail last Friday, the current decline should be a buying opportunity.


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Company News and Earnings in the Stock Market


Third-quarter U.S. earnings have just begun, but already U.S. companies are sounding alarm bells about the fourth quarter.

The 116 companies in the S&P 500 that have reported results so far have posted, on aggregate, a 3.7% drop in earnings. If the trend continues, which it is projected to, it will mark the first year-over-year decline in earnings since 2009.

Just 38 percent of S&P 500 companies beat expectations on revenue in the past week, compared with 41 percent since the start of the reporting period, and well below the 62 percent long-term average, Thomson Reuters data showed.

On the earnings side, the data has been slightly more upbeat: 62 percent of companies that reported this past week beat expectations versus 60.3 percent since the start of the earnings period, and the 62 percent long-term average, the data showed.

Investors have sold off shares after weak results, and more profit taking may be in store for the stock market, given the big gains they've seen since the start of the year.

Outlooks for the fourth quarter — just two weeks old — are so far decidedly more negative than positive. Thomson Reuters data shows 11 negative outlooks so far from Standard & Poor's 500 (SPX) companies and no positive outlooks.

Third-quarter guidance, meanwhile, at the comparable period showed 6 negative outlooks and no positive.

The stock market has seen this play out before — companies systematically lower the bar, only to exceed estimates by a fair amount, resulting in "surprises" that bolster stock prices. This hasn't happened yet in this earnings season, but investors are on the lookout for it.

U.S. companies so far are having a tougher time beating analyst expectations in the third quarter, with 59 percent of companies exceeding forecasts, below the 62 percent long-term average, based on Thomson Reuters data. And year-over-year growth is expected to be negative for the first time in three years.

Revenue trends have also been weak: Just 50 percent of companies that have reported have beaten estimates on revenue, compared with the 62 percent average.

The clamor of bad news from tech only grew louder on Thursday thanks to a premature press release from Google showing a massive earnings miss. This was followed after hours by disappointing news from Microsoft. When you combine that with poor showings from Intel and IBM it becomes hard to find a silver lining from this news.

This weak earnings season is only getting weaker. The number and variety of companies with lackluster news extends beyond these tech behemoths. It may become hard for the stock market as a whole to trudge higher at this stage without some stronger catalysts.

As has recently been mentioned -- stocks seem to be undervalued -- but investors never take a straight path from undervalued to fair valued. Instead we take more of a meandering course with tons of detours and pauses for reflection.

So after moving up towards the highs once again, the stock market may sink back lower in the range. And probably will stay there through the election. Afterwards, if the economy is improving as it is now, then we will likely have a Santa Claus stock market rally that gets us to around 1500.


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Earnings Effects on the Nasdaq and S&P 500

On Thursday, U.S. initial employment claims rose more than expected and the stock market sagged. But by noon, the indices had recovered, only to hit a brick wall when worse-than-expected Google earnings were prematurely reported, and the stock fell over $60, taking the Nasdaq down with it. American Express (NYSE:AXP) also fell short of analysts’ estimates, but Travelers Companies (NYSE:TRV) and Verizon Communications (NYSE:VZ) beat estimates.

At Thursday’s closing bell, the Dow Jones Industrial Average made up most of its losses at 13,549, down 8 points, the S&P 500 fell 4 points to 1,457, and the Nasdaq was down 31 points at 3,073. The NYSE traded 718 million shares and the Nasdaq crossed 453 million. Decliners were slightly ahead of advancers on the Big Board, but on the Nasdaq, decliners led by 2.1-to-1.

The Nasdaq is not faring quite so well as the other indices -- and it’s no wonder. This past week saw the index hit with earnings disappointments by some of its key players, namely Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and Google.

On Thursday, the Google miss contributed to the failure of the Nasdaq to punch through resistance at the 50-day moving average at 3,097. A close above that barrier would have partially overcome the downward momentum generated by the head-and-shoulders break at 3,100.

Instead, the next support is at 3,040, which matches the September and October lows. The near-term trend for the Nasdaq is down, and the target of the neckline breakdown at 3,100 is 3,000.


Despite the nasty earnings from several big names in the tech sector, the S&P 500 has handled it well. The bull channel has been slightly broadened, but the formation is holding above the 50-day moving average at 1,433. Resistance is at the closing high of 1,466 and the absolute high of 1,474.51, both made on Sept. 14.

Results

So far, the broad market has been able to sustain the shocks of earnings disappointments from key blue-chip tech stocks. Only the Nasdaq has felt the impact of selling, but even it shows remarkable strength.

Europe has been relatively quiet, except for the rioting in Athens, as German attempts to hold the union together. Spain is expected to ask for help (a positive), and Italy sold a record amount of bonds. If no sleeping giants awake before the end of October, our own stock market could break to new highs, particularly after the elections.


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Economic News Influencing The Stock Market

The economic data has been improving overall for the past few weeks, and the past week saw several encouraging reports. Both retail sales and industrial production were better than most analysts expected, while the leading indicators jumped an impressive 0.6% in September. It therefore is not warning of a new recession on the horizon, and their coincident index points toward ongoing economic growth.

Housing starts beat estimates by over 100,000, and this chart confirms that they clearly have bottomed after completing a nice base in late 2011. Existing home sales were lower on Friday, as the increased demand has reduced the inventory. The chart of existing home sales does appears to have bottomed, as it has broken out of its base formation.

The rise in building permits also helped boost the LEI, and the Philadelphia Fed Survey had the first positive reading since April.

The consumer price index rose 1.9% in September from the same month a year earlier, slower than a 2.0% on-year gain in August and matching the median forecast of 12 economists polled by Dow Jones Newswires.

Meanwhile, the producer price index fell 3.6% in September from the same month a year ago, after a 3.5% on-year decline in August. The median forecast of 12 economists polled by Dow Jones Newswires was for a drop of 3.4%.


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Overseas Influences on the Stock Market

China's consumer inflation is likely to extend its current moderating trend into the fourth quarter, according to a report on state television Monday, which cited a statistics bureau official.

The Euro crisis seemed to stabilize in the middle of last week, but then on Friday the calm was shaken by comments from German Chancellor Merkel that the rescue fund should not be used to clean up banks' bad assets. This will make it much more difficult for Spain and Ireland.

Spanish Prime Minister Mariano Rajoy, who received a euro zone pledge earlier this year of up to 100 billion euros to recapitalize the nation's banking sector, said he had still had not decided whether to request a sovereign bailout.

China’s GDP was released last Thursday, and the growth rate of 7.4% represented the seventh declining quarter in a row. However, the data for September showed healthy increases in industrial production and retail sales. This may help allay some of the fears of a hard landing for their economy.

There are signs that China’s housing prices may finally be stabilizing, as they have bounced nicely from the lows seen early in the year. The extreme price highs in early 2010 coincided with a high in the Shanghai Composite of around 3,300 and that index recently tested the 2,000 level. An improvement in their economy would certainly be a positive for our economy and stock market.

The S&P 500 So Far This Millennium

For some perspective on the latest stock market action, the chart below presents the trend of the S&P 500 so far this millennium. As the chart illustrates, stock market action since 2000 has been extremely volatile with two massive bear markets each being followed by a strong recovery rally. It is interesting to note that both of these bear stock market rallies are somewhat similar in form (i.e. strong first-year rally followed by a more moderate rally in succeeding years). As for the current state of the stock market, the S&P 500 continues to trade within the confines of its three-year uptrend but is currently testing resistance.

Chart of the S&P 500 since 2000


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Sentiment in the Past Week

The bearish sentiment should increase with last Friday’s close, which should be supportive for prices. The percentage of bulls from American Association of Individual Investors (AAII) could drop below 25%, which is often recorded near important lows (not market tops).

The weekly figures from the Investors Intelligence (II) sentiment survey are out. Here are the highlights:

Bullish sentiment among advisors fell to 42.6% (3.1% decrease).

Bearish Sentiment among advisors rose to 26.6% (1.1% increase).

• 30.8% of advisors foresee a correction in the market.

There is more pessimism this past week than last, as the bulls fell a decent amount and the bears rose slightly. The bulls-minus-bears line has now fallen to 16%, which is its lowest reading since the end of July. The low level of optimism shown in this poll is pretty encouraging, given the market is not too far off multi-year highs.

The table below compares the current data to typical data since 2005.


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The NYSE in the Past Week

The market tone going into the past week’s opening was negative. Stocks had dropped the prior week, closing weak on Friday, and the short–term momentum was negative. Last Friday, the market was even weaker, with the Dow dropping over 200 points and the Nasdaq Composite losing over 2%.

Several of the major averages had broken out of their flag formation, which was confirmed by the NYSE A/D line. Though this action was bullish, it did allow for a pullback before the market could fuel an even stronger rally. With Friday’s steep drop, the action early in the week ahead will be even more important, as the major averages are already back to first good support.

A drop below the October 12 lows in the S&P 500 or NYSE Composite would certainly weaken the near–term outlook. Since the broad–based NYSE Advance/Decline (A/D) line did confirm the recent highs, the intermediate trend is positive.

The Major ETFs in the Past Week

**A more detailed report can be obtained by ……CLICKING HERE…..**

Further Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – October 22, 2012

2. The Week Ahead in the Stock Market – October 22, 2012

3. The Major ETFs in the Week Ahead – October 22, 2012


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