Thursday saw stocks bull their way back from the precipitous plunge that occurred Wednesday afternoon.
A round of upbeat earnings reports from high-profile Dow components provided a much-needed catalyst for the bulls, with traders cheering quarterly results from the likes of 3M Company (MMM), AT&T (T), and Caterpillar (CAT).
Positive economic data from the euro zone provided an additional boost, and the Dow racked up a 200-point gain by the time midday rolled around.
"And just like that, things are better," said Schaeffer’s Senior Technical Strategist Ryan Detrick. "As ugly as yesterday was, today was just as nice for the bulls. Earnings across the board came in very strong, and buyers stepped up."
The 200-point rally represents a very strong bounce back from Wednesday’s Fed-fueled 109-point drop on the Dow. The rally began overseas as China’s market continues to recover and European markets rallied around stronger-than-expected manufacturing data for the euro zone.
“Europe continues to surprise on the upside. It’s bolstering the outlook for global growth. People were most pessimistic about Europe and the fact it continues to trade well is giving confidence to the recovery story,” said Nick Kalivas, vice president of financial research at MF Global.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,322.30) finished with a great gain of 201.77 points, or 1.99%.
The S&P 500 Index (SPX – 1,093.67) had a big gain, on the day, of 24.08 points, or 2.25%.
The Nasdaq Composite (COMP – 2,245.89) also had a good gain of 58.56 points, or 2.68%.
The Russell 2000 Index of smaller companies had an excellent gain of 22.84 points, or 3.73%, to settle at 635.49.
Almost every single Dow stock closed higher, led by American Express (AXP), United Technologies (UTX) and Boeing (BA). The index's worst performers were defensive in nature: Travelers (TRV) and Johnson & Johnson (JNJ).
Led by Qualcomm (QCOM) and Autodesk (ADSK), the Nasdaq Composite outperformed the broader markets, soaring 2.7%.
Among the S&P 500's biggest risers, Janus Capital Markets (JNS) shares shot up 12% after the asset manager reporting profit nearly doubled and inflows into its fixed-income products.
The major indexes posted their largest daily gains in more than two weeks, led by United Parcel Service Inc (UPS), which rose 5.2 percent after it raised its outlook. The world's largest package delivery company is viewed as a barometer of consumer and business demand.
"UPS guiding higher is a very good sign since the amount of shipping volume is directly correlated to the strength of the economy," said Peter Jankovskis, co-chief investment officer of OakBrook Investments LLC in Lisle, Illinois.
About 8.86 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.
Breadth was positive. On the New York Stock Exchange, winners beat losers by over six to one on volume of 1.18 billion shares. On the Nasdaq, advancers beat decliners by five to one on volume of 2.28 billion shares.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) closed above both its 50-day moving average and the 10,300 level for the first time since July 15. Next up for the Dow is a showdown with its 200-day moving average, located right near 10,400.
• The S&P 500 Index’s (SPX) ended atop its 50-day trendline for the first time in a week.
• The Nasdaq Composite (COMP), the tech-rich index, back atop the 2,200 level.
• Crude futures kept pace with stocks today, with black gold notching healthy gains as traders rediscovered their risk appetites. Solid corporate earnings boosted sentiment in the oil patch, as did predictions for an imminent tropical storm. The National Hurricane Center cited the formation of a tropical depression in the Atlantic basin, with the disturbance predicted to make its way toward production facilities in the Gulf Coast later this week. By the close, crude oil for September delivery added $2.74, or 3.6%, to finish at $79.30 per barrel.
• Gold futures were also buoyed by the bull run on Wall Street, but the precious metal pared its gains after an unsuccessful challenge of the looming $1,200-per-ounce level. Ahead of stress-test results from European banks, which are due out Friday, gold's gains were relatively muted. Gold for August delivery ended the day up $3.80, or 0.3%, at $1,195.60 an ounce.
• Bonds: Treasury prices fell, raising the yield on the 10-year note to 2.93% from 2.89% late Wednesday.
• Underscoring the easing of jitters on Wall Street, the VIX, or the markets' so-called "fear gauge," slid 4%, giving back much of Wednesday's gains.
The rally picked up further steam after the National Association of Realtors said existing home sales slid just 5.1% in June, surprising traders who had been bracing for a drop of 8.1%. The news was a rare bright spot for the housing industry, which has seriously lagged behind the broader recovery.
It boosted home builders like KB Home (KBH) and home improvement retailer Home Depot (HD).
The House voted to extend jobless claims benefits until November, ending a seven-week old debate between lawmakers that saw federal benefits for the long-term unemployed run out. President Obama is expected to sign the extension shortly.
Earlier, the Department of Labor reported that the number of Americans filing new claims for unemployment rose to 464,000 last week from a two-year low of 427,000 in the prior week. Economists surveyed by Briefing.com thought claims would rise to 445,000.
Continuing claims, a measure of Americans who have been receiving benefits for a week or more, fell to 4,487,000 from 4,710,000 in the previous week. Economists surveyed by Briefing.com expected 4,600,000.
The index of leading economic indicators fell 0.2% in June, the Conference Board reported, after rising 0.5% in May. Economists expected the index to have fallen 0.4%.
Economic jitters faded on Thursday as new data out of Europe showed industrial orders in the euro zone unexpectedly climbed 3.8% in May over the previous month and 22.7% annually, beating expectations for a slight drop. Also, a euro-area purchasing manager’s index rose from 56.7 to 56 in June, topping projections for a drop to 55.5. The surprisingly solid data soothed the markets, sending major indexes up more than 1% in Europe.
The economic reports out of Europe were "a big surprise because everyone expects that to be the Achilles heel of the global economy," said Anthony Chan, chief economist at J.P. Morgan Private Wealth Management in New York.
Problems in Europe set off the big drop in stocks in late April. As Greece struggled to make debt payments and ratings agencies downgraded the government debt of several companies, stocks plunged in the U.S. on fears that the domestic recovery was in jeopardy. Stocks then fell further as U.S. economic reports showed that the recovery was at best bumpy. Some investors feared a "double dip," or the economy falling back into recession.
In currencies, the euro gained versus the dollar. The dollar rose versus the Japanese yen.
European Markets rallied around the upbeat manufacturing data. The U.K.'s FTSE 100 jumped 1.90% to 5313.81, Germany's DAX soared 2.53% to 6142.15 and France's CAC 40 surged 3.05% to 3600.57.
Asian Markets: Japan's Nikkei 225 slid 0.62% to 9220.88, Hong Kong's Hang Seng gained 0.50% to 20589.70 and China's Shanghai Composite rallied 1.07% to 2562.41.
Company Earnings Reports
3M (MMM) posted a 43% rise in net income and a profit of $1.54 a share, topping the Street's view of $1.48. The industrial conglomerate's revenue jumped 17.7% to $6.73 billion, narrowly beating expectations for $6.62 billion. 3M also forecasted 2010 EPS of $5.65 to $5.80, which would exceed forecasts for $5.63.
AT&T (T) beat the Street with a non-GAAP profit of 61 cents a share, compared with estimates for 57 cents. Revenue rose 0.6% to $30.81 billion, almost matching estimates for $30.81 billion. The telecom said it activated 3.2 million Apple (AAPL: 259.29, 5.05, 1.99%) iPhones during the quarter.
EBay (EBAY) rallied 4% in the wake of the online auction site’s 26% rise in net income and non-GAAP EPS of 40 cents. Analysts had been expecting EPS of just 38 cents. EBay also said its revenue rose 6% to $2.2 billion, narrowly beating the Street’s view of $2.16 billion. However, the company’s third-quarter revenue view would miss estimates.
Starbucks (SBUX) reported in-line non-GAAP EPS of 29 cents and issued tepid EPS guidance for 2011 that would at best meet estimates.
Union Pacific (UNP) reported a 53% rise in second-quarter net income and a record EPS of $1.40, easily beating the Street’s view of $1.21. Revenue at the railroader soared 27% to $4.2 billion, well ahead of estimates for $4.08 billion.
Xerox (XRX) soared 7% after reporting a stronger-than-expected non-GAAP EPS of 24 cents, compared with estimates for 21 cents. The office technology company’s revenue of $5.5 billion was slightly shy of expectations but it issued full-year outlook that would top the Street’s view.
Eli Lilly (LLY) said its second-quarter profits jumped 16% and its non-GAAP EPS of $1.24 easily exceeded estimates. The drug maker’s revenue rose 9% to $5.75 billion, compared with estimates for just $5.58 billion. Eli Lilly also upped its 2010 guidance above consensus forecasts.
**After the close, Dow component Microsoft (MSFT) reported higher quarterly sales and earnings that topped estimates, thanks to strong sales of its Windows 7 and a better personal computer market than in recent months. Shares were barely changed after the close.
**Also after the close, Dow component American Express (AXP) reported higher quarterly sales and earnings that topped expectations. But AmEx's CEO said the company remains cautious about the economic outlook and shares dipped 1% in after-hours trading.
Company News and Movements:
• General Motors (GM) said it will buy auto financing firm AmeriCredit (ACP) in a $3.5 billion all-cash deal. The deal gives GM a lending unit after selling its majority stake in GMAC in 2006. The deal was also seen as a key step as GM prepares its initial public offering for later this year, after the government restructured it in bankruptcy. AmeriCredit shares jumped 23%.
• Computer maker Dell (DELL)
The following companies had some impressive options movements:-
RadioShack Corporation (RSH)
Calls were the options of choice on RSH yesterday, with about 18,000 contracts crossing the tape. This surge of activity roughly doubled the stock's expected daily call volume; meanwhile, only 4,201 puts were exchanged on the electronics retailer.
Data from the International Securities Exchange (ISE) confirms the skew toward calls. During the course of Wednesday's trading, speculators on the ISE bought to open 7,151 calls on RSH, compared to 45 puts. The equity's single-day ISE call/put volume ratio of 158.91 leaves no doubt as to the relative popularity of calls over puts.
Gilead Sciences, Inc. (GILD)
GILD garnered a substantial dose of call volume on Wednesday, with 24,000 contracts crossing the tape in the wake of the company's earnings report. On the ISE, traders bought to open 1,388 calls on the stock, compared to just 81 puts -- netting the shares a single-day ISE call/put volume ratio of 17.14.
The Cheesecake Factory Incorporated's (CAKE)
Earnings are on The Cheesecake Factory Incorporated's (CAKE) menu today, with the restaurant chain set to report on its second quarter after the close. In its past four quarterly reports, CAKE has surpassed the consensus profit estimate on a per-share basis. This time around, analysts are looking for a profit of 38 cents per share.
Ahead of earnings, put players bombarded CAKE, with 1,255 of these bearish bets changing hands on Wednesday -- nearly double the equity's expected single-session put volume of around 680 contracts.
The August 20 put commanded the majority of the attention, with 796 contracts traded -- 100% at the bid price, revealing they were sold. Overnight, open interest at this strike ballooned by 348 contracts, indicating that a portion of these puts were sold to open.
Deere & Company (DE)
The shares of Deere & Company (DE) have extended their recent run higher today, with the stock flirting with a 2.3% gain at last check. However, taking a look at the action in the options pits reveals that one speculator may be betting on a short-term pullback for the machinery mogul.
Earlier today, symmetrical blocks of August 50 and August 60 puts changed hands for the ask prices of $0.21 and $1.49 per contract, respectively. At the same time, twice as many August 55 puts crossed the tape for the bid price of $0.53 per contract. As such, and assuming the volume will translate into new positions, it appears we may have unraveled a long put butterfly on the stock.
• The CBOE Volatility Index (.VIX) lost 1.28 to 24.36. Trading in the options market is active, with about 6.3 million calls and 4.9 million puts traded so far.
• Xerox (XRX) shares gapped higher and are up 67 cents to $9.08 after the company reported a 24-cent per share second quarter profit, which was 3 pennies better than Street estimates. XRX also raised guidance for the full year. Directional sentiment in the options market seems to reflect some bullishness as well. 10,390 Jan 9 calls traded (99 percent Ask). Another 4238 Jan $10 calls traded (60 percent Ask). Implied volatility is down about 7 percent to 34, as shares rally and move to their best levels in nearly one month.
• A massive buy-write was initiated in the Select Sector Financials (XLF) early Thursday after an investor sold 30K Dec 15 calls at 76 cents and bought 3 million shares at $14.33. Shares are up 28 cents to $14.43 and implied volatility down about 3 percent to 33 (compared to a 52-week high and low of 53 and 21.5.)
• Gerdau Ameristeel (GNA) adds 2 cents to $10.97 and order flow is bearish for the third time in four trading sessions. On July 19 and yesterday, the focus was on September 10 puts. Open interest increased by 4,200 following Monday’s action and by another 4000 since yesterday. At 21,299 contracts, the Sep 10 put now has the most open interest in the name. Today, the focus is on the Mar 10 puts, which have traded 4100X including multiple lots at the 5-cent ask price. Looks like opening put buyers. This stock rallied on June 1 on news Gerdau SA is acquiring the company. Shares have been trading in a range since and the interest in GNA puts is likely hedging around the deal. Implied volatility is down 20 percent to 23.5 today.
• Cephalon (CEPH), which moved higher yesterday after the company raised its second quarter earnings guidance, is down $1.21 to $59.83 on news the European Medicines Agency has recommended restricting the use of Provigil. Players are jockeying for the stock’s next move, with, for example, active trading seen in Aug 55 puts and 80 calls ahead of July 27 (after market) earnings. Implied volatility is up 9 percent to 34.
• Bullish flow detected in American Eagle Outfitters (AEO), with 4722 calls trading, or 2x the recent average daily call volume in the name.
• Bullish flow detected in Athenahealth (ATHN), with 2206 calls trading, or 3x the recent average daily call volume in the name.
• Bullish flow detected in Cabot Oil and Gas (COG), with 2112 calls trading, or 4x the recent average daily call volume in the name.
• Increasing volume is also being seen in UPS, Qualcomm (QCOM), and Safeway (SWY).
The bulls managed to completely erase Wednesday’s triple-digit selloff, which was driven by Federal Reserve Ben Bernanke’s “unusually uncertain” economic outlook. Those comments helped bolster worries the U.S. economy could suffer a double-dip recession.
“We’ve had a constant tug-of-war between softness in the economic data stream and better-than-expected corporate news. Today the corporate news is clearly winning,” said Art Hogan, chief market strategist at Jefferies & Co.
Guy LeBas, chief fixed income strategist of Janney Montgomery Scott in Philadelphia said there are two groups in the market fighting back and forth, which has led to the volatility. One believes the economy is going to fall back into recession, while the other thinks this is just a pause in a strong rebound.
"There's no middle ground," LeBas said. As a result, he said, each group will pounce on news that backs up their claims and send the market sharply higher or lower. "We are absolutely hypersensitive to what we're seeing."
The Dow and Nasdaq closed just below the levels they started off with at the beginning of the year, which has proven to be very a volatile with many ups and downs.
“Talk about a roller coaster year but here we are,” said Hogan. “I don’t know if it’s good or bad, but it’s fact. There are the same competing forces of investors who feel like we can go into a double-dip and those who think equities are valued very attractively.”
Investors had plenty of reasons to buy on Thursday. Caterpillar said its orders are growing and production will pick up in the second half of the year. UPS raised its outlook because of spending by businesses. Caterpillar's stock rose 1.7 percent, while UPS gained 5.2 percent.
"The companies that are doing well generally are the ones that have significant overseas revenues or some kind of unique product," said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.
Investors found Thursday's round of data particularly encouraging because a number of bellwether companies posted revenue that topped analysts' estimates and climbed from the prior year, reversing a trend seen in recent days of companies missing revenue expectations even as their earnings beat estimates.
"To the extent that companies are able to grow revenues as well as earnings is a clear positive," said Bill Quinn, chairman of American Beacon Advisors.
Chris Hobart, founder of Hobart Financial Group in Charlotte, N.C., said the outlooks are especially important because, if companies expect to grow, they'll need to hire again.
If improved forecasts lead to jobs growth, "then this can be better than a good quarter or good second half, (it can mean) we've got a good economy," Hobart said.
"We're worried about the economy and the future, and this week is really the test," said Jack Ablin, chief investment officer at Harris Private Bank, of the slew of quarterly results.
"It's a window on the second half and so far it looks pretty good," Ablin added.
But investors might be ready to sell again when trading resumes Friday. After the close of regular trading, Amazon.com Inc. issued a report that fell short of expectations. Its stock fell almost 14 percent in after-hours trading. If the market gives back gains Friday, it would follow its pattern of falling on disappointments in what so far has been a mixed earnings season.
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