Wednesday saw U.S. stocks alternate between gains and losses as Wall Street continues to search for a catalyst for the next move.
Finally, stocks closed with moderate gains as a rebound in bank shares offset weakness in commodities and concerns about rising interest rates in the Treasury market.
U.S. stocks sputtered most of Wednesday as prospects of a tax-cut deal lifted hopes for economic growth but also sparked a surge in Treasury yields on the possibility of an expanding federal deficit.
“After the big announcement on the supposed tax deal — well, it doesn’t seem like it’s all that done yet — and then you have people coming at both sides with an issue,” said Jay Suskind, senior vice president at Duncan-Williams of the divergent views being expressed in the equities and bond markets.
“It adds a little more uncertainty into the mix,” Suskind added. Illustrating the shaky sentiment, stock indexes meandered between mild gains and losses.
As has been the case for much of this week, Wall Street traders have no major economic or earnings reports on the agenda on Wednesday to use for guidance. That means the closely-watched bond markets and the euro may play an outsized role in influencing Wall Street. Stocks hit session lows as a selloff in the Treasury market gained momentum.
The ambivalence comes after a near triple-digit rally on the Dow fizzled on Tuesday as enthusiasm for an apparent compromise to extend the Bush tax cuts for two years was offset by dollar strength and Democratic dissension on tax cut.
Wall Street hit session lows earlier as selling in the bond market gained momentum, with the yield on the 10-year note hitting its highest level since June 22. The bond markets have received greater attention as Treasuries hit six-month highs on Tuesday in the wake of the tax deal in Washington, which drove up forecasts for economic growth and the U.S. budget deficit. Wall Street could be moved later in the day by a key auction of $21 billion in 10-year notes.
Results for Major Market Indexes
Uncertainty continues to cloud the Street, as traders mull over the impact of various economic data. Among the issues being discussed around the water cooler are President Obama's extension of Bush-era tax cuts, a strengthening U.S. dollar, rising Treasury yields, and the Federal Reserve's latest bond purchase. In fact, at 1 p.m. EST today, the Treasury Department will announce the results of its recent sale of $21 billion in 10-year notes -- which could be a good indication of the state of the market, according to analysts.
As a result of the day's mixed tone, the Dow Jones Industrial Average (DJIA -- 11,343.99) is trading 15.17 points, or 0.13%, lower heading into the afternoon. The Dow is now struggling to maintain its perch above the 11,350 level, which has emerged as a floor for the index during the past several days.
Elsewhere, the S&P 500 Index (SPX -- 1,223.25) has flirted with breakeven all day; at last check, the SPX had shed 0.63 point, or 0.03%. Meanwhile, the Nasdaq Composite (COMP -- 2,602.50) has continued its recent rally, adding 4.35 points, or 0.16%, to hover just above the 2,600 level.
The Dow Jones Industrial Average (DJIA – 11,372.48) finished with a gain of 13.32 points, or 0.12%.
The S&P 500 Index (SPX – 1,228.28) finished the day with a gain of 4.53 points, or 0.37%.
The Nasdaq Composite (COMP – 2,609.16) also ended the day, with a gain of 10.67 points, or 0.41%.
The Russell 2000 Index of smaller companies had a loss of 0.18 points, or 0.02%, to settle at 764.24.
Half of the Dow's 30 stocks closed with gains, led by financial-related companies Bank of America (BAC), JPMorgan Chase (JPM) and American Express (AXP). The index's weakest links were Boeing (BA) and McDonald's (MCD), which was hurt by its November sales report.
The Nasdaq Composite outpaced the broader markets, landing at its best level since January 2008. The index driven higher by tech stocks like Yahoo! (YHOO) and Electronic Arts (ERTS).
Financial stocks helped prop up the markets, with BofA, Goldman Sachs (GS) and Morgan Stanley (MS) all gaining more than 2% a piece. Regional banks like Fifth Third Bancorp (FITB) and PNC (PNC) saw even heavier buying.
The group appeared to benefit from US Bancorp (USB), which told investors that fourth-quarter loan growth would double sequentially.
Bank stocks have risen 10 percent since the start of the month as benchmark yields have climbed enough to make lending and trading more profitable.
"What's giving the financials a little boost is a more positively sloped yield curve, which means better profit for them," said Joseph Battipaglia, market strategist at Stifel Nicolaus in Yardley, Pennsylvania.
Yields reached a six-month high this week after the initial deal reached in Washington to extend tax cuts fueled concern about inflation and the government's debt burden.
Volume was light with about 7.9 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below the year-to-date moving average of 8.63 billion.
Declining stocks outnumbered advancing ones on the NYSE by 3 to 2, while on the Nasdaq, decliners slightly beat advancers 1321 to 1316.
Notes of Interest….
• The Dow Jones Industrial Average (DJIA) powered higher in the final minutes of trading, settling with a gain of 13.3 points, or 0.1%.
• The S&P 500 Index’s (SPX) also erased an early deficit by the close, tacking on 4.5 points, or 0.4%.
• The Nasdaq Composite’s (COMP) spent the least amount of time in negative territory today, advancing 10.7 points, or 0.4%, to finish north of the 2,600 level for the first time since January 2008.
• Crude futures backpedaled once again today, thanks to escalating fears that a Chinese interest-rate hike would arrive sooner rather than later. In addition, the Energy Information Administration reported a surprise increase in domestic gasoline and distillate supplies for the week ended Dec. 3, exacerbating crude's decline. By the close, crude oil for January delivery gave up $2.50, or 0.5%, to settle at $88.28 per barrel.
• Gold futures: Concerns about a looming interest-rate increase from China also weighed on gold futures today. Furthermore, a strengthening greenback and another round of profit taking also contributed to the precious metal's second straight session in the red. Against this backdrop, February-dated gold futures finished with a loss of $25.80, or 1.8%, at $1,383.20 an ounce – the commodity's lowest closing price since Nov. 29.
Bonds: he price on the benchmark 10-year U.S. Treasury fell, pushing the yield up to 3.24% from 3.13% late Tuesday. The yield was the highest since late June.
The U.S. sold $21 billion worth of re-opened 10 year notes Wednesday, after auctioning $32 billion in 3-year notes Tuesday.
An offering of $13 billion in re-opened 30-year bonds is scheduled for Thursday.
Investors were also digesting the deal struck Monday between President Obama and Republican lawmakers to extend tax cuts for those making more than $250,000 a year.
Obama touted the compromise, which would also extend unemployment benefits and create a payroll tax holiday for workers, as a boon for middle-class Americans. But at a news conference Tuesday, the president said he would push to have the tax cuts eliminated for high earners after the two-year extension is over.
Art Hogan, chief market analyst at Jefferies & Co., said the deal is a positive for the economy and the financial markets. But he added that investors are awaiting the final details of the plan, which is expected to face some resitance from Democrats.
"This is something that will have longer term benefits, and will gradually work its way into the marketplace," he said.
Asian markets took a hit amid continued worries that China will raise interest rates in an effort to prevent its economy from overheating. Talk of inflation problems in China has hurt U.S. markets because China serves as the engine for much of the global recovery.
Currencies: Market sentiment was hurt a bit by further weakness for the euro, which declined 0.13% to $1.3221. The currency has failed to rally around Ireland passing a key budget that clears the way for it to receive emergency aid from the European Union.
"The dollar is one of the most important catalysts here," said Quincy Krosby, market strategist with Prudential Financial. "The market is being hit with a number of different factors, and we're mostly focused on how they affect the dollar."
The dollar gained 0.2% against the euro and 0.6% the Japanese yen, but it lost 0.1% against the British pound.
European Markets ended the day mixed. Britain's FTSE 100 dipped 0.2% and the DAX in Germany fell 0.4%, while France's CAC 40 added 0.6%.
Asian Markets ended mixed. The Shanghai Composite lost almost 1% and the Hang Seng in Hong Kong dropped 1.4%, while Japan's Nikkei gained 0.9%.
Company Earnings Reports
Costco Wholesale Corp. (COST )
Costco Wholesale Corp. posted an 18% increase in fiscal first-quarter profit, buoyed by rising gasoline prices and strong international growth, the warehouse retail chain said Wednesday. Issaquah, Wash.-based Costco (COST ) said it earned $312 million, or 71 cents a share, in the period, up from $266 million, or 60 cents a share, in the same quarter a year ago.
Net sales rose 11% to $18.82 billion, while same-store sales, those at outlets open at least a year, increased 7%.
On average, analysts polled by FactSet Research had expected the company to earn 69 cents a share on sales of $20.59 billion.
Shares of Costco were essentially flat in early action.
“International comparisons benefited from currency and the U.S. business strengthened as the quarter progressed,” wrote Brian Sozzi of Wall Street Strategies. “In the U.S., Costco was exposed to an improved consumer spending environment, translating to increased sales of bulk items in sundries and fresh food and better sales trends in discretionary areas of the store, such as in apparel.”
By all accounts, he added, “Black Friday and the weekend were strong for Costco as consumers bought door busters (Costco has perhaps the best return policy in the business) and again, stocked the pantry for holiday festivities.”
Men's Wearhouse Inc (MW)
Shares of Men's Wearhouse Inc (MW) dropped as much as 16 percent on Wednesday, a day after the specialty retailer forecast a weaker-than-expected holiday quarter.
The Houston-based company, which rents out about one in every three tuxedos in the United States and Canada, said gross margins fell 101 basis points to 42.7 percent in the third quarter, hurt by aggressive promotional offerings.
"While we are impressed by effective marketing strategies that are successfully attracting new customers, we are cautiously optimistic on the company's ability to deliver margin expansion ahead of rising product costs," Wedbush Securities analyst Betty Chen said in a note.
However, the analyst said it would benefit long-term investors to hold onto the stock since the company could "re-trace EBIT margins over time."
Men's Wearhouse shares have gained almost 30 percent since the company posted second-quarter results in September. They were down 14 percent at $24.67 in morning trade after touching a low of $24.14 earlier in the session.
Company News and Movements:
• American International Group (AIG) and the Treasury Department are planning a large stock sale in the first half of next year that could lower the U.S.’s stake in the bailed-out insurance giant by as much as 20 percentage points, Reuters reported. Both sides would sell stock in the offering, which could total more than $10 billion, the wire service reported.
• MasterCard (MA) may be feeling the effects of pulling the plug on controversial WikiLeaks as the card giant’s corporate Web site has been dogged by technical glitches. Supporters of WikiLeaks, the organization ridiculed by some for dumping thousands of sensitive U.S. documents, had warned they would attack companies hostile to its founder, Julian Assange. MasterCard said it doesn't know if the problems are related to its decision to cut ties with WikiLeaks.
• Bank of America’s (BAC) legal “war room” aimed at protecting itself from a potential WikiLeaks document dump is focusing on BofA’s Countrywide arm and conversations between former CEO Ken Lewis and ex-Treasury Secretary Henry Paulson, FOX Business’s Charles Gasparino reported.
• McDonald’s (MCD) slumped 2% after saying its same-store sales rose 4.8% globally in November. Analysts had been expecting growth of 5.6%. U.S. and European same-store sales climbed 4.9%, but its Asia/Pacific, Middle East and Africa segment saw sales increase just 2.4%.
• Fortune Brands (FO) unveiled plans to split itself apart, spinning off or selling its golf and home products units. The maker of Jim Beam bourbon could eventually sell its spirits business, which is ranked as the world’s fourth-biggest. • Home Depot (HD) hiked its 2010 outlook, projecting 2.3% sales growth and EPS of $1.97. Analysts had been calling for EPS of $1.94. For 2011, Home Depot sees EPS growing 7% to 9% and sales to climb 2% to 2.5%.
• Shares of two Chinese technology companies, Youku.com and Dangdang.com, were sharply higher after both companies made their debut in the U.S. market.
• Youku.com (YOKU), an Internet video provider similar to Youtube.com, jumped 130% to $27.89 in New York. The Beijing-based company priced its offering of more than 15 million U.S.-listed shares at $12.80 each.
• Shares of Dangdang.com (DANG) surged 76% to $28.10, after the consumer e-commerce company priced its IPO at $16 per U.S. depository share.
Green Mountain Coffee Roasters Inc. (GMCR)
According to a company press release yesterday, Green Mountain Coffee Roasters Inc. (GMCR) will release its fourth-quarter earnings report after the close of trading on Thursday, Dec. 9. Currently, analysts are expecting GMCR to bank a profit of 20 cents per share, nearly doubling the company's profit of 11 cents per share in the same quarter last year.
Historically, Green Mountain Coffee Roasters appears to have put in a strong fundamental performance, but the full picture won't be known until the company restates its prior results. On Nov. 11, the company announced that it would restate its financial performance for fiscal years 2007 to 2009 and the first three quarters of fiscal 2010 due to errors. The errors were found while the company prepared for its year-end audit and conducted an internal investigation prompted by the Securities and Exchange Commission. The adjustments are expected to lower cumulative net income by 4 cents to 5 cents per share, the company said.
Expectations among options traders may be a bit lower for the coffee specialist, as GMCR's put/call open interest ratio (SOIR) of 1.20 arrives above 83% of all such readings taken in the past year. In other words, short-term options traders have been more bearish toward GMCR only 17% of the time in the prior 52 weeks.
Checking in with GMCR's open interest configuration, we find that options traders are focusing heavily on the December 25 and 30 put strikes. Currently, 10,339 December 25 puts are open, while 10,229 contracts reside at the December 30 put. On the call side, peak open interest totals 7,773 contracts at the December 33.33 strike, while another 7,724 calls are open at the December 30 strike. This skew toward deep out-of-the-money puts and in-the-money calls indicates that options traders are not looking for GMCR to rally much higher.
Pessimism is also thick within the short-selling community. During the past month, the number of GMCR shares sold short spiked 17.44% to 24.37 million. As a result, more than 23% of the stock's float is now sold short, and could provide ample fuel for a short-covering rally.
Wall Street, meanwhile, has very little room for additional bullish sentiment. For instance, the equity has earned seven "buy" or better ratings, versus just three "holds" or worse. However, Thomson Reuters reports that the 12-month consensus price target for the stock rests at $41.29 per share, a modest 9.5% premium to GMCR's close on Tuesday. Should the company post solid quarterly results after the close tomorrow, there is the room for potential price-target increases, but analyst downgrades are just as likely if the company fails to live up to expectations.
Turning to the stock's technical performance, the shares are sitting on a gain of more than 38% since the start of 2010. What's more, the equity has recently pulled its 10-week and 20-week moving averages into a bullish cross. This technical formation often precedes additional gains for the security. However, GMCR must still overcome resistance at the $38 level, which is home to the stock's early October peak, as well as the round-number $40 region. That said, a breakout above this ceiling could send GMCR sharply higher, especially in the event of strong quarterly earnings report.
The following companies had some impressive options movement :-
Archer Daniels Midland Company (ADM)
ADM attracted a heavy dose of call volume on Tuesday, with volume rising to 1.64 times the usual level. Approximately 10,000 calls changed hands on ADM during the course of the session, compared to just 3,304 puts.
On the International Securities Exchange (ISE) alone, speculators on Tuesday bought to open 2,988 calls on ADM, along with just one put.
The day's strong skew toward bullish bets over bearish continued a recent trend for ADM, which has racked up a 10-day ISE call/put volume ratio of 14.04. This ratio ranks higher than 92% of other such readings taken during the previous year, suggesting that traders have rarely purchased calls over puts at a faster clip.
In the same optimistic vein, ADM's put/call open interest ratio (SOIR) of 0.61 indicates that calls comfortably outnumber puts among options slated to expire within three months. This ratio rests in the 23rd percentile of its annual range, as short-term options players have been more bullishly aligned less than one-quarter of the time during the past year.
The center of attention on Tuesday was ADM's March 34 call, where 4,506 contracts were exchanged -- 95% at the ask price, confirming a bias toward buying activity. Open interest at this strike rose overnight by 4,129 contracts, revealing that a healthy number of new bullish bets were added.
However, it's worth noting that short interest on ADM climbed by 9.5% during the most recent reporting period. As a result, it's possible that traders have been buying calls in order to hedge their shorted shares, rather than to speculate bullishly on the stock.
On the charts, it's easy to see why short sellers are ramping up their bearish exposure to ADM. The stock recently tumbled below its 10-week and 20-week moving averages, and these formerly supportive trendlines are now on the verge of completing a bearish cross in the $31 region. Going forward, these looming trendlines could switch roles to act as resistance.
Bank of Ireland (IRE)
Bank of Ireland (IRE) was bombarded by options players on Tuesday, as the Irish parliament voted on the government's austerity budget. Yesterday afternoon, Irish Finance Minister Brian Lenihan unveiled the country's toughest budget on record, which calls for EUR6 billion in spending cuts and tax increases across all income brackets. This morning, the European Union Commission applauded the new budget, calling it "tough and ambitious."
By Tuesday's closing bell, IRE had seen about 16,000 calls change hands – roughly four times the expected daily call volume. Most popular was the December 3 call, which saw around 3,600 contracts exchanged – 74% of which traded at the ask price, suggesting they were bought. Furthermore, the December 3 strike saw call open interest swell overnight, pointing to freshly opened optimistic positions.
Meanwhile, IRE saw roughly 12,000 puts exchanged yesterday, more than eight times the equity's predicted single-session put activity. A healthy portion of the volume centered on the January 3.98 put, which saw more than 2,900 contracts change hands. However, the majority of the back-month puts traded at the bid price, and put open interest ballooned overnight, hinting at sell-to-open activity. By writing the 3.98-strike puts to open, the sellers are betting IRE will surmount the strike by the time January-dated options expire.
At last check, the shares of IRE have continued their recent rally, tacking on 2.3% to flirt with the $2.70 level.
Other Options News
• Bullish flow detected in Prudential Financial (PRU) , with 6813 calls trading, or 2x the recent avg daily call volume in the name.
• Bearish activity detected in Williams Companies (WMB) , with 8783 puts trading.
• Bearish activity detected in Optionsxpress Holdings (OXPS) , with 2515 puts trading, or 3x the recent avg daily put volume in the name.
• Increasing volume is also being seen in Lowe’s (LOW), Kohl’s (KSS) and Ciena (CIEN) .
ConclusionThe Nasdaq Composite landed on Tuesday at its highest level since January 2008, the bulls have struggled to push the broader markets above their best levels of the year. The Dow and S&P 500 have closed virtually unchanged in each of the previous three sessions.
Wednesday marked the fourth consecutive day of the Dow closing less than 20 points away from where it opened. It’s no wonder Wall Street barely budged as traders had no major economic or earnings reports to use for guidance. That left most of the attention on the bond and currency markets, which were also relatively calm.
Underscoring how lifeless the markets have been of late, the Dow has traded in a range of just 1.72% over the past five sessions, the lowest since early November.
Given the 290-point rally on the Dow, the fact the blue chips have flatlined this week “can be construed as a net positive for the bulls,” said Michael James, managing director of equity trading at Wedbush Securities. “Without some significant negative macro news, it’s going to be hard for the market to pull back too much going into the end of the year.”
The mini rally comes after a near triple-digit rally on the Dow fizzled on Tuesday as enthusiasm for an apparent compromise to extend the Bush tax cuts for two years was offset by dollar strength and Democratic dissension on tax cut.
Some analysts expect the market to trade sideways for a few days before mounting an upward move heading into the year's end.
Bob Doll, chief investment strategist at BlackRock, told the Reuters 2011 Investment Outlook Summit Wednesday the deal to extend the Bush-era tax cuts should accelerate the move of cash into equities and out of fixed income.
Steady economic improvement should fuel stock gains through 2011, according to a Reuters poll of investors and strategists, but international concerns could limit advances in the second half of the year.
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