Tuesday saw U.S. stocks aimlessly drifting earlier in the day, then headed south in the afternoon as the U.S. dollar renewed its rally against the euro.
Also some harsh criticism from China likely stoked investors' anxiety, as the world's largest holder of U.S. debt slammed the Fed's accommodative monetary policy. Specifically, the Dagong Global Credit Rating Co. slashed its credit rating on the U.S. to A+ from AA, citing a "deteriorating debt repayment capability and drastic decline of the government's intention of debt repayment."
Meanwhile, renewed worries about euro zone debt continued to plague the market. Ahead of the upcoming G-20 finance ministers' meeting in Seoul, traders took the opportunity to pull some profits off the table.
The losses come despite some positive M&A news out of the energy sector in the form of Chevron's (CVX) $3.2 billion takeover of Atlas Energy (ATLS). The dollar, which tends to move in the opposite direction of stocks, overshadowed the enthusiasm for the rally in the energy sector.
There weren't many major economic or corporate headlines to move stocks on Tuesday. Traders were still digesting last week's surge on Wall Street, which tacked on 325 points to the Dow and marked the index's strongest week in two months.
“I kind of think the market needs to consolidate here a little bit before it tries to push up again,” said Nick Kalivas, vice president of financial research at MF Global.
Gold and silver soared to new highs, while oil prices also gained. Cotton prices rose 6% to another all-time high following a USDA crop report that cut production outlook for 2011.
Prices for commodities of all sorts have been on a tear since the Fed announced plans last week to pump $600 billion into the economy via a monetary policy dubbed QE2. While the policy was largely expected, investors are still figuring out how it will impact various assets, including stocks and currencies.
"Clearly, QE2 is dominating this morning," said Lawrence Creatura, a portfolio manager with Federated Clover Investment Advisors. "The entire commodities complex is continuing its explosion skyward and the dollar looks weaker."
At the same time, some commodities are benefiting from concerns that Fed policy will lead to a bout of inflation at some point in the future.
"Investors searching for potential alternatives in a world where paper currency, specifically dollars, may be less trustworthy than they once were," said Creatura.
Stocks drifted between small gains and losses as investors remain hesitant to push the market higher after a recent runup.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 11,346.75) finished with a loss of 60.09 points, or 0.53%.
The S&P 500 Index (SPX – 1,213.40) also had a loss, on the day, of 9.85 points, or 0.81%.
The Nasdaq Composite (COMP – 2,562.98) didn’t fare any better, with a loss of 17.07 points, or 0.66%.
The Russell 2000 Index of smaller companies had a big gain of 11.64 points, or 1.53%, to settle at 725.53.
Volume was light, with about 8.9 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with the year-to-date daily average of 8.72 billion.
About 11 stocks fell for every 4 that rose on the New York Stock Exchange, while on the Nasdaq, about 19 stocks fell for every 7 that advanced.
Notes of Interest….
• The Dow Jones Industrial Average (DJIA): Despite today's modest dip, the Dow remains well north of its rising 10-day moving average.
• The S&P 500 Index’s (SPX) is also trading comfortably above the 10-day trendline.
• The Nasdaq Composite (COMP) rose to a new annual high of 2,592.94 right out of the gate, but the tech-rich COMP eventually succumbed to the undertow.
• Crude futures snapped their six-day winning streak, with the hot commodity's momentum halted by strength in the U.S. dollar. Revived concerns about sovereign debt in the euro zone helped send the greenback higher, which diminished demand for crude futures -- particularly with the front-month contract touching a two-year peak of $88.16 earlier in the session. Crude oil for December delivery shed 34 cents, or 0.4%, to end at $86.72 per barrel.
• Gold futures rallied to yet another record high today. Concerns about steadily mounting government debt -- both at home and abroad -- helped generate demand for the popular safe haven asset, even as the U.S. dollar gained ground. Gold for December delivery peaked at $1,424.30 an ounce before easing back to finish at a new closing high of $1,410.10 per ounce -- a daily gain of $6.90, or 0.5%.
• Bonds: The price on the benchmark 10-year U.S. Treasury edged lower, pushing the yield up to 2.59% from 2.56% late Monday.
U.S. wholesale inventories jumped more than expected in September as demand failed to keep up with production, sugggesting output will remain soft as wholesalers try to trim stocks, a government report showed on Tuesday.
Inventories surged 1.5 percent, matching a July gain that was the biggest increase in more than two years, the Commerce Department said. Analysts polled by Reuters were expecting a 0.7 percent increase.
Wholesale sales rose a less-than-expected 0.4 percent, raising questions about whether inventories were gathering dust on shelves. Analysts polled by Reuters were expecting a 0.6 percent gain in sales.
In currencies: In the currency market, the dollar fell against the euro, the U.K. pound and Japan's yen as investors expect QE2 to undermine the greenback. A weaker dollar typically supports prices for commodities priced in the U.S. currency, such as oil and gold.
European Markets closed higher. Britain's FTSE 100 rose 0.4%, the DAX in Germany ticked up 0.5% and France's CAC 40 added 0.8%.
Asian Markets: ended the session lower. The Shanghai Composite fell 0.8%, the Hang Seng in Hong Kong dropped 1% and Japan's Nikkei declined 0.4%.
Company Earnings Reports and News
• Tyco International (TYC) beat the Street with a non-GAAP profit of 74 cents a share, compared with estimates for 66 cents. Revenue rose 4% to $4.49 billion, narrowly beating the Street’s view of $4.44 billion. Tyco also said it is selling a 51% stake in its electrical and metal products business to private equity firm Clayton Dubilier & Race for $720 million.
• Sara Lee (SLE) missed estimates with a non-GAAP profit of 13 cents a share, compared with forecasts for 17 cents. Revenue dipped slightly to $2.59 billion, but topped expectations. Sara Lee also sold its North American Fresh Bakery business to Mexico' Grupo Bimbo for $959 million.
• Barclays (BCS) reported a 76% decline in third-quarter profits amid slowing investment-banking activity. However, the U.K. banking giant soothed shareholders by saying it has no plans to raise cash to comply with new regulatory requirements.
• Dean Foods (DF) plunged 14% to 52-week lows after badly missing estimates with a third-quarter profit of 13 cents a share on sales of $3.05 billion. Analysts had been calling for EPS of 21 cents. The company also said it sees non-GAAP EPS of 13 cents to 18 cents for the current quarter, which would also come in shy of estimates, and announced the resignation of Jack Callahan, its chief financial officer.
Company News and Movements
• GE (GE) announced a $2 billion investment in China through 2012. $500 million of the funds will be used to increase research and development, while $1.5 billion will be invested with joint ventures with Chinese state-owned enterprises. GE shares eased 0.2%.
priceline.com Inc. (PCLN)
With priceline.com Inc. (PCLN) shares soaring more than 8% to a fresh all-time high above the $420 level, it seems that recent attention to call options is paying off for a few lucky PCLN bulls. The company posted an adjusted third-quarter profit of $5.33 per share after the close last night, compared to Wall Street's expectations for earnings of $4.97 per share. PCLN also projected fourth-quarter earnings above the consensus estimate.
In addition to the stock's surge higher this morning, PCLN is also drawing in more call buyers. Specifically, a block of 78 contracts traded on the November 420 call at about 9:40 a.m. for the ask price of $7.50, while another block of 50 contracts crossed on the November 430 call for the ask price of $8.26.
That said, the largest block has traded on the put side this morning. At 9:41 a.m., a block of 659 November 380 puts traded for the ask price of $0.30. This front-month put is currently about 40 points out of the money, and the trader would need PCLN to plunge more than 9.5% just to reach breakeven.
Cisco Systems Inc. (CSCO)
Traders still have to slog through another two trading sessions before networking giant Cisco Systems Inc. (CSCO) will release its quarterly earnings report, and if recent activity in the options pits is any indication, the stock could continue to see call open interest rise. For instance, volume swelled to more than 141,700 contracts on Monday, more than doubling CSCO's daily options activity. Some 76% of this volume traded on the call side of the coin.
As a result of the recent call activity, CSCO's put/call open interest ratio (SOIR) has slipped from its post October expiration perch near 1.10 to its current perch at 0.98. There appears to be additional room on the bullish bandwagon, as the current SOIR arrives above 80% of all those taken in the past year.
Turning to the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), we find that nearly four calls have been bought to open for every one put purchased in the prior two weeks. The resulting 10-day call/put volume ratio arrives just 11 percentage points shy of an annual bullish peak.
CSCO is also trading below peak front-month call open interest at the 25 level. More than 46,000 calls reside at the November 25 strike, creating a potential layer of options-related resistance overhead. Taken together, these readings indicate that CSCO has its work cut out for it when it steps into the earnings confessional after the close of trading tomorrow night.
The following companies also had some impressive options movements :-
JA Solar Holdings Co., Ltd. (JASO)
JA Solar Holdings Co., Ltd. (JASO) reported today that its third-quarter earnings surged to $77 million, or 47 cents per share, up from last year's results of $17.3 million, or 10 cents per share.
Revenue increased to $541 million, compared to $193 million in the year-ago quarter. Both figures surpassed Wall Street's expectations, as analysts surveyed by Thomson Reuters were looking for a profit of just 34 cents per share on revenue of $453.8 million.
Looking ahead, JASO boosted its 2010 shipment forecast to more than 1.45 gigawatts (GW), up from its previous guidance of 1.35 GW. Additionally, the alternative energy issue has inked 1.2 GW of supply agreements for delivery in 2011.
JASO has jumped 5.7% ahead of the open, with the stock set to challenge round-number resistance in the $10 region. The equity's current annual high stands at $10.24, so JASO could encounter some psychological pressure as it approaches double-digit territory.
However, a capitulation by bearish bettors could help JASO muster enough buying pressure to tackle this looming technical hurdle. Short interest accounts for 10.1% of the equity's float, pointing to a healthy supply of sideline cash for the solar stock.
AK Steel Holding Corporation (AKS)
AK Steel Holding Corporation (AKS) was hit with a downgrade today, as Goldman Sachs adjusted its ratings on a slew of steel stocks. AKS was downgraded to "neutral" from "buy," with Goldman citing cost pressures from higher raw material prices, as well as decreased visibility on a recovery in the firm's electrical steel business. The brokerage firm also trimmed its price target on AKS to $12 from $15, implying an expected pullback of about 1.4% to Monday's close.
The shares have slipped fractionally lower in electronic trading, adding to their year-to-date drop of 34.4%. Since May, AKS has been pinned beneath unrelenting pressure from its 10-month and 20-month moving averages.
Given the stock's lackluster price action, it's no surprise that speculative investors have adopted a bearish bias toward AKS. The security's put/call open interest ratio (SOIR) of 0.83 rests in the 88th percentile of its annual range, suggesting that short-term options players have been more pessimistically aligned only 12% of the time during the past year.
China-Biotics Inc. (CHBT) stepped into the earnings spotlight this morning, unveiling a fiscal second-quarter profit of $10.8 million, or 33 cents per share. Revenue for the period rose 37.6% to $23.6 million, while research and development expenses ballooned 123.1% to $1.6 million. The results fell short of Wall Street's expectations, with analysts looking for a profit of 37 cents per share on $27 million in revenue.
CHBT has tumbled more than 7% in pre-market trading, with the stock pulling back toward support at its 20-day moving average. This short-term trendline hasn't been breached on a daily closing basis since Sept. 28.
Plenty of pessimism seems to have been priced into CHBT already, judging by the equity's hefty short-to-float ratio of 47.4%. Plus, the equity's SOIR of 1.15 rests in the 61st annual percentile, pointing to a skeptical attitude among near-term options players. With so many bears betting against the stock already, CHBT could soon find a floor for its post-earnings pullback.
Research In Motion Limited (RIMM)
Research In Motion Limited (RIMM) was downgraded to "hold" from "buy" at Kaufman Bros. this morning, with analyst Shaw Wu citing increased competition from Google's (GOOG) Android and Apple's (AAPL) iPhone. "We agree with Steve Jobs in that it isn't clear there is room for a third software platform besides [Apple's] iOS and Android," wrote Wu in a note to clients. The analyst also slashed his price target on RIMM to $60 from $72, representing a premium of just 6.2% to Monday's close.
RIMM is down 0.8% ahead of the open, deepening a recent breach of support at its 10-day moving average. The equity has been consolidating just above $55 since late October, treading water beneath familiar resistance from its 10-month moving average.
With the shares sitting on a substantial year-to-date deficit of 16.4%, very few traders are betting on RIMM to rebound. The stock's SOIR of 0.95 rests in the 89th annual percentile, and short interest accounts for a noteworthy 7% of RIMM's float. In other words, traders seem to share Wu's low expectations for the security.
The markets ended in a stalemate on Monday as the rallying dollar ended the Dow's six-day surge, but tech stocks kept the Nasdaq Composite afloat.
After initially losing ground, the U.S. dollar did a 180 and began to make headway on the euro. The euro was recently down 0.35% to $1.3870. A stronger dollar makes it more difficult for companies to sell their products overseas.
Stocks had been climbing since late August, when a speech by Fed chairman Ben Bernanke first raised speculation about the possibility of QE2. But stocks have been drifting sideways since the plan was officially unveiled.
"Stocks are at a moment of questioning after the run we've had," said Dan Cook, senior market analyst at IG Markets. "It's hard to be bullish or bearish on any instrument right now."
The S&P 500 added 3.6 percent last week, its fifth straight week of gains.
Investors came into the week ready to book profits from the rally that took stocks last week to their highest levels since September 2008 after the Federal Reserve's announcement of its stimulus plan to help the ailing economy. The dollar, which has had an inverse relationship with stocks lately, fell to multi-month lows.
"We basically had a straight line up (in stocks) since September and we didn't even have a 2 percent or more correction yet. I think the dips are actually healthy for the market," said Stephen Massocca, managing director in Wedbush Morgan in San Francisco.
The market's recent strong run higher has pushed the S&P 500 up to near resistance around the 1,228 level, which would retrace 61.8 percent of the decline between its highs in 2007 and the 12-year low in March 2009.
This point, a Fibonacci retracement, is closely followed by technical chartists and often triggers buying or selling.
Investors have seen gold as an inflation hedge following the Fed's announcement last week that it would buy $600 billion in government debt in an effort to stimulate the sluggish U.S. economy, and the view has bolstered commodity shares.
In addition, investors are looking ahead to this week's meeting of leaders from the Group of 20 major economies, which starts Thursday.
The meeting comes against a backdrop of tensions over trade and currency policies. While expectations are high for the G20 meeting, analysts said a definitive accord is unlikely to be achieved.
"There has been some pretty strong rhetoric recently, but I don't think they will find any consensus," said Cook.
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