Tuesday saw the bulls and bears launch a session-long battle over the latest round of earnings and economic reports and stocks didn't stray too far from break-even.
In the optimists' corner of the ring was blue-chip chemical company DuPont (DD), which reported solid second-quarter earnings and lifted its full-year forecast. In addition, the S&P/Case-Shiller home price index rose 1.3% from April to May, echoing Monday's upbeat housing stats. On the flip side, the bears came out swinging' after a steeper-than-anticipated dip in the Conference Board's Consumer Confidence index, which fell to a five-month low of 50.4 in July.
Nevertheless, by the time the closing bell sounded, it was essentially a wash - the stocks churned all day, losing steam after a three-session run.
Better-than-expected results from a number of companies had propelled markets in the morning, extending the recent rally. But that advance lost steam, with technology and consumer stocks hit the most.
Schaeffer’s Senior Technical Strategist, Ryan Detrick, says he'll take what he can get. "All in all, not a bad day," Detrick concluded. "Given we've just had three straight 100-point gains, today's flat market has to be considered a victory for the bulls."
"I still have a favorable view of the market, but I think the extreme move in the last few days warrants some consolidation or pullback," said Nick Kalivas, senior equity index analyst at MF Global in Chicago.
"We started out OK in the morning with earnings, and then we got more economic news, which never helps," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
"The earnings season is going very well, and the commentary about the third and fourth quarters seems to be giving investors a lot of comfort that things are progressing nicely," said Deutsche Bank's Fitzpatrick.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,537.69) finished with a small gain of 12.26, or 0.12%.
The S&P 500 Index (SPX – 1,113.84) had a small loss on the day, of 1.17 points, or 0.10%.
The Nasdaq Composite (COMP – 2,288.25) had a loss of 8.18 points, or 0.36%.
The Russell 2000 Index of smaller companies had a loss of 3.06 points, or 0.46%, to settle at 662.16.
Most of the Dow's 30 components closed higher, led by DuPont and Hewlett-Packard (HPQ) . The index's worst performers were Cisco Systems (CSCO) and American Express (AXP) .
The Nasdaq Composite lost more ground than the broader markets as technology stocks such as Research in Motion (RIMM) and Amazon.com (AMZN) struggled.
About 8.43 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, short of last year's estimated daily average of 9.65 billion.
Breadth was negative. On the New York Stock Exchange, losers beat winners by eight to seven on volume of 1.11 billion shares. On the Nasdaq, decliners edged advancers by seven to six on volume of 2.07 billion shares.
Notes of Interest….
• The Dow Jones Industrial Average’s (DJIA) now boasts a 1.1% year-to-date gain after four (4) positive sessions.
• The S&P 500 Index’s (SPX) gave up 1.2 points, or 0.1%. Nevertheless, the SPX maintained its perch atop the 1,100 level, and is now virtually neck-and-neck with its 200-day moving average. Also, the index's 14-day moving average line crossed over its 50-day moving average, creating a so-called "golden cross" that indicates positive short-term momentum.
• The Nasdaq Composite (COMP), the tech-rich index, despite exploring the region north of the 2,300 level in intraday activity, swallowed a loss of 8.2 points, or 0.4%, by the closing bell.
• Crude futures settled in the red today, as discouraging data on consumer confidence escalated fears of ebbing demand. In addition, the strengthening greenback made it more expensive for holders of foreign currencies to scoop up the dollar-denominated commodity, which also weighed on black gold. Against this backdrop, crude oil for September delivery suffered its steepest daily drop since July 1, giving up $1.48, or 1.9%, to end at $77.50 per barrel.
• Gold futures erased early gains to finish lower today, as a softer dollar negated the metal's allure as a safe-haven investment. In addition, gold's intraday breach of $1,175 an ounce triggered a slew of sell-stop orders, exacerbating bullion's slide. Taking a cue from the oil pits, August-dated gold futures succumbed to their steepest single-session dip since July 1, surrendering $25.10, or 2.1%, to settle at a three-month low of $1,158 an ounce.
• Bonds: Treasury prices fell, and the yield on the 10-year note climbed to 3.05% from 2.99% late Monday.
Consumer confidence declined in July, according to the Conference Board's closely watched index, which fell to 50.4 from an upwardly revised 54.3 in June. Economists surveyed by Briefing.com thought the index would decline, but only to 51. The report served to underscore the weak outlook for consumer spending heading into the fall, and caused stocks to erase early gains.
"The consumer confidence index was below expectations but not surprising," said David Chalupnik head of equities at First American Funds. "We had a down market in May, June and early July, and that weighs on consumer spending and confidence."
However, the data put heavy pressure on the consumer discretionary sector, which 1.3%, making it the worst performing group. Stocks such as Toyota (TM) and Whirlpool (WHR) closed solidly lower on the data.
Also, apparel retailers were some of the hardest hit by the drop in consumer confidence. AnnTaylor Stores Corp. fell 33 cents, or 5 percent, to $16.87. Talbots Inc. fell 51 cents, or 4.3 percent, to $11.43.
The gloomy consumer confidence report overshadowed a second straight cautiously upbeat report on the hurting housing market. S&P/Case-Shiller said U.S. home prices in 20 cities rose by 1.3% over the previous month and 4.6% from the year before, exceeding estimates for just 0.3% to and 4% respectively, suggesting pricing has stabilized.
Markets in Europe rallied around stronger-than-expected results from banking giants UBS (UBS) and Deutsche Bank (DB). Shares of UBS soared 8.9% after the Swiss bank said it earned $1.9 billion last quarter, bouncing back from a $1.2 billion loss a year earlier. Deutsche Bank also rallied after the German bank beat estimates with a $1.5 billion second-quarter profit.
In currencies, the euro fell against the dollar, while the U.S. currency gained versus the Japanese yen.
European Markets rose. The CAC 40 in France gained 0.8%, Germany's DAX rose 0.2% and the FTSE 100 added 0.3%.
Asian Markets finished mixed. Japan's benchmark Nikkei index edged down 0.1% and the Hang Seng in Hong Kong ended 0.6% higher.
Company Earnings Reports and News
Dow component DuPont (DD) reported higher quarterly sales and earnings that topped estimates, thanks to higher prices and increased demand. The chemical maker also boosts its earnings forecast for the year. Shares gained 3.6%.
Swiss bank UBS (UBS) reported higher quarterly profit that topped estimates, thanks to the stock market rally and currency trading gains. U.S.-traded shares gained 9%.
Swiss rival Credit Suisse (CS) also reported a better-than-expected profit as tax and accounting gains tempered the impact of investment banking losses. Shares gained 4.4%.
German competitor Deutsche Bank (DB) reported higher quarterly earnings. But revenue was weaker due to a decline in its investment banking profit. Shares gained 2.8%.
Tellabs (TLAB) reported higher quarterly sales and earnings that beat estimates and lifted its fiscal second-quarter outlook. But shares of the communications gear maker dropped on concerns that it will lose some of its business building wireless networks for AT&T to a rival vendor. Shares fell 5.9%.
BP: BP posted a huge quarterly loss of $17.2 billion due to costs connected to the Gulf of Mexico oil spill. The company also said that British CEO Tony Hayward will be replaced by American Robert Dudley Oct. 1. BP (BP) shares fell 1.7%.
Valero (VLO) beat the Street with second-quarter EPS of 93 cents and a 25% rise in revenue to $21.78 billion. Analysts had been projecting EPS of just 71 cents and revenue of $21.66 billion from the No. 2 U.S. refiner.
Cummins (CMI) quadruped its net income and posted EPS of $1.25, easily topping estimates for just 91 cents. The engine manufacturer’s sales soared 32% to $3.21 billion, well above the Street’s view of $2.84 billion. Cummins said it sees 2010 revenue of $13 billion, which would significantly beat estimates.
Lexmark (LXK) soared 8.4% after beating the Street with second-quarter non-GAAP EPS of $1.23, compared with estimates for 93 cents. The company’s revenue climbed 14% to $1.02 billion, exceeding estimates for $968.6 million. Lexmark also issued stronger-than-expected EPS guidance for the current quarter.
**However, other major companies reported disappointing second-quarter results, including Office Depot (ODP), U.S. Steel (X) and Masco (MAS).
Office Depot (ODP) lost 7% of its value after the office supplies retailer reported a worse-than-expected 4% decline in sales to $2.7 billion. However, Office Depot beat the Street with a loss of 7 cents a share, compared with estimates for a deeper loss of 17 cents.
U.S. Steel (X) warned its third-quarter results will likely be weaker than its second quarter profits due to lower flat-roiled shipping and production volumes, sending the company’s stock 6.4% lower. U.S. Steel missed expectations with EPS of 45 cents, which is well below estimates for 63 cents.
Masco (MAS) reported a 95% plunge in net income and weaker-than-expected sales of $2 billion, sending the building products maker’s stock down 11.7%. However, Masco’s non-GAAP EPS of 16 cents topped estimates by 3 cents.
**With just over one-third of the S&P 500 having reported, Earnings are currently on track to have risen 34% from a year ago, according to earnings tracker Thomson Reuters.
David Chalupnik head of equities at First American Funds, said the gap between economic and earnings news reflects that U.S. companies benefit from exposure to strong emerging markets and a not-yet slowing European economy, offsetting the weakness in the U.S. economy.
Company News and Movements:
• General Motors said its Chevrolet Volt electric car will start at $41,000. The auto maker plans to offer a $350-a-month lease on the highly-anticipated vehicle.
• Oracle (ORCL) CEO Larry Ellison topped The Wall Street Journal's list of highest paid executives of the past decade, raking in $1.84 billion in compensation.
Wyndham Worldwide Corporation (WYN) will step into the earnings confessional before the opening bell tomorrow. Historically speaking, the company has been stellar in the earnings spotlight, surpassing the Street's per-share profit predictions in each of the past four quarters. However, judging by the latest action in the options pits, it appears speculators may be betting on Wyndham to finally snap that winning streak.
On the International Securities Exchange (ISE), WYN currently sports a 10-day put/call volume ratio of 6.54 – in the 93rd annual percentile. In other words, options players on the ISE have bought to open WYN puts over calls at a faster clip only 7% of the time during the past year.
Green Mountain Coffee Roasters Inc. (GMCR)is one of many companies preparing to release its quarterly report this week. Specifically, the coffee concern will take its turn in the earnings spotlight after the close on Wednesday, July 28, with analysts looking for a third-quarter profit of 18 cents per share. GMCR has somewhat of a mixed history in the earnings confessional; in its past four reports, the equity has twice met the consensus estimate, and exceeded analysts' expectations twice.
All in all, expectations aren't too high for GMCR, especially among the brokerage bunch. Zacks reports that the stock has earned five "strong buy" ratings, three "holds," and two "sell" or worse ratings.
Yet in recent weeks, GMCR has gotten something of a technical caffeine jolt, propelling steadily past short-, intermediate-, and long-term resistance. In fact, GMCR is now docked above its 10-month moving average, which supported the stock from November 2008 to April 2010. GMCR is now sitting a comfortable three points above this long-term trendline, with its next technical hurdle being the round-number $30 region.
Despite the stock's technical performance of late, option players remain highly skeptical. In the last two weeks, speculators on the International Securities Exchange (ISE) have bought to open nearly three puts for every call, a ratio which ranks above 97% of all other readings taken during the last year. In other words, traders on the ISE have rarely initiated bearish bets at a faster pace.
The shares of Whole Foods Market, Inc. (WFMI) have skyrocketed more than 45% in 2010, guided higher atop their ascending 10-month moving average. Now, the grocery guru is attempting to surmount the $40-$42 neighborhood, home to its formerly supportive 80-month trendline.
During the past couple of weeks, speculators on the International Securities Exchange (ISE) have bought to open twice as many WFMI puts as calls, as indicated by the equity's 10-day put/call volume ratio of 2.16. What's more, this ratio stands higher than 80% of all others taken during the past year, suggesting traders on the ISE have rarely initiated bearish bets over bullish at a faster clip.
Analysts also have relatively low expectations for WFMI. According to Zacks, the equity has earned only five "buy" or better endorsements, compared to 14 tepid "holds." Meanwhile, Thomson Reuters deems the average 12-month price target on the stock at only $40.60 – just fractionally higher than the security's closing price of $39.63 on Monday.
In the same bearish vein, short interest on the stock increased by almost 13% during the past month, and now represents nearly 11% of WFMI's total available float. In fact, at the equity's average pace of trading, it would take close to two weeks for all of these pessimistic positions to be repurchased.
Genzyme Corporation (GENZ)
The buzz around the option-trading water cooler is all about French-based Sanofi-Aventis' possible bid on biotech titan Genzyme Corporation (GENZ). In fact, when this potential merger-and-acquisition news broke last week, GENZ jumped over 10 points, hitting a new high on Friday. In the days following, GENZ has continued the trend of new highs, hitting an annual acme of $68.23 today.
Consequently, option activity has been rampant on GENZ today, with 46,000 contracts traded by midday -- 14 times the equity's usual daily volume of around 3,100 contracts. Puts have been far more popular than usual, with 18,000 of these bearish bets changing hands so far -- 23 times GENZ's expected single-session put volume.
Ambac Financial (ABK), the New York-based surety and title insurance company, jumps 11 cents to 97 cents per share. Options action is heating up as well, with players flocking to Aug 1 and 1.5 calls. 5620 and 2094 traded, respectively, and about 70 percent trading at the Ask. Sep 1.5, Nov 1, and Jan12 1 calls are seeing action as well. 13K calls and 1370 puts on the tape so far. Implied volatility is down 4 percent, but remains elevated at 150. The company last reported earnings on May 18. Shares gapped down and are off 33.6 percent since that time. However, the stock has been performing better over the past few days, up 47 percent since July 19.
**Large blocks of out-of-the-money Pfizer (PFE) calls have traded in recent action. Shares are up 21 cents to $15.23 and it includes: 50K Dec 18 calls at 15 cents, 50K Dec 17 calls at 30 cents, 50K Sep 17 calls at 10 cents, 50K Aug 16 calls at 11 cents, and 30K Dec 16 calls at 58 cents. Sources tell us this is a brokerage firm crossing blocks for account swaps, Not a spread or directional play on the pharmaceutical maker.
Sprint Nextel (S) is down 23 cents to $4.82 and options are actively traded for a second day heading into earnings, tomorrow before market. Open interest in Aug 5 call options increased by 19,494 following a day of active trading Monday. At 110,970 contracts, the August 5 call option is now the largest position in Sprint. Another 13,438 traded to day, with 67 percent traded at the Ask. Meanwhile, Sep 5 calls have traded 4681X (96 percent Ask) and the top trade in Sprint today looks like a buyer of 3300 Aug 5 puts at 29 cents each on ISE. Overall, the flow over the past two days seems to reflect optimism heading into the results. Implied volatility is up nearly 10 percent to 55 and, although shares are down today, the stock is up 14.2 percent month-to-date.
Option Skews –Relatively Heavy Call Activity
Here are the stocks that saw a bias toward call activity in the previous session. This filtered scan is based on the International Securities Exchange (ISE) buy-to-open data. It looks for stocks where the previous day's call volume on the ISE is at least twice as great as the put volume. It then sorts the stocks based on the call volume. Since this is buy-to-open data, this can be a good source for finding stocks where optimism is emerging.
The following companies had some impressive options movements:-
• Bullish flow detected in Silicon Labs (SLAB), with 7800 calls trading, or 5x the recent average daily call volume in the name.
• Bullish flow detected in Time Warner (TWX), with 5380 calls trading, or 3x the recent average daily call volume in the name.
• Bullish flow detected in Itau Unibanco Banco Holding SA (ITUB), with 5428 calls trading, or 3x the recent average daily call volume in the name.
• Increasing volume is also being seen in MGM, Boeing (BA), and Xerox (XRX).
The choppy day on Wall Street comes after the Dow jumped 101 points on Monday, landing at two-month highs and returning to positive territory on the year.
“It’s too hard to be bearish. Last week was a pretty big shift. Clearly the momentum is with the bulls right now. How long that continues, we’ll see,” said Michael James, senior equities trader at Wedbush Morgan Securities. “Trying to fight this right now is a losing battle. I’m not uber bullish but being too negative is the wrong move right now. But that could change on a dime.”
Wall Street's economic worries resurfaced after a new report from the Conference Board showed consumer confidence dropped from 54.3 in June to 50.4 in July, missing forecasts for a more modest decline to 51.0. The news was the latest in a string of reports suggesting trouble for the economic recovery.
Consumer confidence has fallen in recent months as people have waited in vain for a turnaround in the job market. That has made many consumers hesitant to spend and in turn raised concerns about the economic recovery. Most retail stocks fell after the confidence number was released.
John Brady, a senior vice president at MF Global in Chicago, said there is little that's likely to turn around consumer confidence in the near future. Consumers won't become more optimistic until they see a drop in unemployment and clear signs that employers are hiring.
"I don't know what turns around confidence aside from jobs growth," Brady said.
Some market participants were impressed Wall Street avoided a steep selloff in the wake of the gloomy consumer confidence report, especially given the rally over the past several days.
“There was a perfect excuse to slam a market that might be short-term overbought,” said NSYE trader Ted Weisberg. “I think we’re moving higher.”
The fact that stocks didn't fall further on the consumer news was a sign that investors weren't that upset by the reading. During the past few months, bad news after a big gain was likely to send stocks tumbling. But analysts said they saw more cashing in of gains rather than anxiety behind Tuesday's trading.
"People say they want to book their profits rather than wait for another plunge," said Richard A. Dickson, senior market strategist, at Lowry Research.
The market had some other negative economic news Tuesday, a report of a slowdown in regional manufacturing from the Richmond Federal Reserve. The Richmond Fed's manufacturing index fell to 16 this month from 23 in June.
Companies have a very different take on the economy from consumers.
Investors have been torn over the past few months between buying on companies' upbeat reports and selling on government and private sector numbers that keep pointing to a slowing of the economy.
"Investors are really uncertain whether to focus on the underlying economy or earnings," said Tyler Vernon, principal and portfolio manager at Biltmore Capital Advisors.
Although earnings had investors' attention the past two weeks, the occasional economic number like Tuesday's consumer confidence survey can trump companies' results, Vernon said. When earnings reports are done, unsettling data on jobs, housing and consumer spending will dominate trading, and may well lead to more selling.
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