Thursday saw U.S. stocks post tepid gains, down slightly from their earlier rally in the day, as investors mulled over better-than-expected reports on the U.S. trade deficit and weekly jobless claims.
Bulls got an early boost from today's employment data, as the Labor Department noted that initial jobless claims fell by a steeper-than-expected 27,000 last week. This solid report stoked some buying pressure during the first half of the day, and the major market indexes found themselves perched on year-to-date gains -- albeit very briefly, as an afternoon report out of the euro zone forced the bulls to tap their brakes.
Deutsche Bank (DB) is said to be considering a stock sale to raise up to $11.4 billion, according to Bloomberg, which reignited all-too-familiar concerns about the fiscal health of European banking giants. Wall Street was swept by an afternoon bout of buyer's remorse, with stocks pulling back fast from their early highs -- but the tug-of-war eventually ended in the bulls' favor.
“I think the market is speculating it has something to do with them being poorly capitalized. It’s certainly creating fears of more supply of equity,” said Nick Kalivas, vice president of MF Global Research.
"The economic data continues to come in a little bit better than expected," concluded Schaeffer’s Senior Technical Strategist, Ryan Detrick. "With the weekly initial claims fluctuating between 450,000 and 500,000 since November 2009, today's reading of 451,000 was very encouraging. If we can get that number beneath 450,000 and down closer to 400,000, it could be very kind to the stock market."
"The employment report is still the king of kings," said Edwin Denson, head of market strategy at Singer Partners LLC. "The labor market is still the indicator that if it's positive, would give people the most comfort."
Unemployment claims have still not fallen enough to suggest that widespread hiring is around the corner, but investors have taken solace in recent employment news that suggest the economy will continue to grow slowly during the rest of the year. Traders concerned about the potential for the economy to slide back into recession drove stocks lower through most of August.
"All we need is slightly good news ... relative to expectations, and at this point expectations are relatively poor," said Tyler Vernon, principal and portfolio manager at Biltmore Capital Advisors.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,415.24) finished with a gain of 28.23 points, or 0.27%.
The S&P 500 Index (SPX – 1,104.18) also had a gain, on the day, of 5.31 points, or 0.48%.
The Nasdaq Composite (COMP – 2,236.20) also had a good day, with a gain of 7.33 points, or 0.33%.
The Russell 2000 Index of smaller companies had another small gain of 0.37 points, or 0.06%, to settle at 634.62.
Most Dow stocks ended in the green, led by Johnson & Johnson (JNJ) and JPMorgan Chase (JPM). The index's worst performers were Boeing (BA) and McDonald's (MCD), which posted August sales growth that failed to impress the markets.
About 6.29 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, far below last year's estimated daily average of 9.65 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of over 3 to 2, while on the Nasdaq, about 5 stocks rose for every four that fell.
Trading volume is 30% below the 3-month moving average, which is not unusual for the shortened holiday week following Labor Day. Nevertheless, that lackluster volume means none of this week's stock market moves amount to much, said Art Hogan, chief market strategist at Jefferies & Co.
"Whatever happens, it doesn't clarify anything in investor's minds. We will have to wait until next week," he said. "That said, it's intriguing that as early as two weeks ago the economic calendar was working in the wrong direction. All we could talk about was a double dip. That has gone the way of the dodo bird now."
Notes of Interest
• The Dow Jones Industrial Average’s (DJIA) reclaimed a perch above the 10,400 level, but is still battling resistance from its 200-day moving average. This trendline is currently docked near 10,450, and has kept a tight lid on the Dow's progress since Friday.
• The S&P 500 Index (SPX) clambered back above 1,100, notching a daily gain of 5.3 points, or 0.5%. Tomorrow, the SPX will face off against its 20-week moving average, which was toppled last Friday for only the second time since April.
The S&P 500 has risen for six of the last seven sessions. Technical analysts continue to point to a bullish inverse "head and shoulder" formation in the index with a "neck line" at 1,130 that could signal a potential break out to around 1,250.
"The frustrating sideways action in the S&P 500 and many developed markets belies a burgeoning build-up of bullish demand, which holds the potential to power prices significantly higher over the final stanza of 2010 and well into 2011," wrote Auerbach Grayson analyst Richard Ross in a research note.
• The Nasdaq Composite (COMP), the tech-rich index, stopped just short of its own 20-week trendline. The COMP hasn't managed a weekly finish above this descending technical ceiling since mid-May.
• Crude futures: Resilience in the equities market didn't carry over to crude futures today, as traders were forced to reckon with persistently high inventories. Despite an unexpected decline in crude supplies during the past week, the Energy Information Administration (EIA) reported that gasoline inventories fell by less than expected, and total commercial stocks of oil and fuel products actually ticked up by 200,000 barrels. With crude futures lingering near two-week highs, traders eventually opted to err on the side of profit taking. By the close, crude oil for October delivery was down 42 cents, or 0.6%, at $74.25 per barrel.
• Gold futures followed suit with crude oil today, with the precious metal losing some of its safe-haven allure amid a generally bullish session for the stock market. However, the contract pared the worst of its losses after the Deutsche Bank news made waves on Wall Street. Gold for December delivery wrapped up the day on a deficit of $6.60, or 0.5%, at $1,250.90 per ounce.
• Bonds: The yield on the 10-year Treasury note rose to 2.76%, from 2.65% late Wednesday.
Initial Jobless Claims
New claims for unemployment benefits fell more than expected last week to their lowest level in two months, a hopeful sign for the troubled labor market.
Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 451,000, the lowest since the week ended July 10, the Labor Department said on Thursday.
Analysts polled by Reuters had forecast claims dipping to 470,000 from the previously reported 472,000 the prior week, which was revised up to 478,000 in Thursday's report.
Analysts said the reports on Thursday helped to calm fears growth was slowing sharply and implied the economy could soon pull out of a recent soft patch.
"We were expecting that things would slow down in the third quarter and start to pick up in the fourth quarter, but now it seems like the slowdown in the third quarter wasn't as severe as we feared," said David Sloan, an economist at 4CAST in New York.
U.S. 30-year mortgage rates rose for the first time in nearly three months in the latest week, according to a Freddie Mac (FMCC) survey released on Thursday.
The average 30-year fixed mortgage rate rose to 4.35 percent in the week through Thursday, from 4.32 percent in the previous week, said Freddie Mac, which collects data as the nation's second-largest provider of home loan funding.
The rate has either fallen or stayed the same every week since June 17, enticing more homeowners to refinance loans. The impact of lower rates has been muted compared with previous refinancing waves, however, as tighter credit standards and the loss of equity in homes disqualified many borrowers.
Fifteen-year mortgage rates held steady at 3.83 percent, the lowest on Freddie Mac's records.
The U.S. trade deficit narrowed more than expected in July, as imports retreated and exports shot to their highest since August 2008, according to a government report on Thursday that could lift hopes for third-quarter economic growth.
The monthly trade deficit shrank 14 percent to $42.8 billion, which was smaller than the mid-point forecast of $47.3 billion from economists surveyed before the Commerce Department report.
Exports rose to 1.8 percent to $153.3 billion, led by strong overseas demand for U.S. civilian aircraft, machinery, computers and other capital goods.
Imports fell 2.1 percent to $196.1 billion, after a 3 percent rise in June that had caught many analysts by surprise and lowered estimates of second-quarter U.S. growth. The drop in July was the largest since February 2009.
Despite the improvement in the monthly trade gap, the cumulative deficit for the first seven months of 2010 rose to $288.83 billion from $203.96 billion in the same period in 2009.
In the second quarter of this year, a sharp widening in the trade gap sliced nearly 3.4 percent pionts off of U.S. economic growth.
July imports from both China and Germany -- two countries with persistent trade surpluses -- were the highest since October 2008.
The closely watched trade deficit with China fell almost 1 percent in July, but for the first seven months of the year it was nearly 18 percent higher, at $145.4 billion, compared to the same period in 2009.
With congressional elections looming in November and U.S. unemployment a high 9.6 percent, U.S. lawmakers are expected to turn their attention to China's exchange rate practices when they return next week from their summer recess.
Many accuse Beijing of deliberately undervaluing its currency by as much as 40 percent to give Chinese exporters an unfair trade advantage.
However, the July increase in U.S. exports, including to China, is good news for President Barack Obama's administration, which has hoped healthy foreign demand will help put the U.S. economy back on a strong footing. Obama has set a goal of doubling exports in five years.
Prices for imported oil fell slightly in July to an average of $72.09 per barrel, the second consecutive monthly decline.
European Markets rose. Both the CAC 40 in France and Britain's FTSE added 1.2%, and the DAX in Germany gained 0.9%.
Asian Markets ended mixed. Japan's benchmark Nikkei index rose 0.8%, and the Hang Seng in Hong Kong edged up 0.4%. The Shanghai Composite tumbled 1.4%.
The dollar rose against the euro, British pound and the Japanese yen.
Company Earnings Reports
McDonald’s (MCD) continued to enjoy the summer as the world’s largest burger joint posted on Thursday August global same-store sales growth of nearly 5%.
A month after enjoying its strongest rise in monthly sales since January 2009, McDonald’s said sales at stores open for more than a year jumped 4.9% system-wide last month. On a constant-currency basis, sales rose 6.2%.
Even as the U.S. recovery lost steam, the fast food giant said its same-store sales rose 4.6% domestically. Sales growth was slower in struggling Europe, increasing just 2.2%. McDonald’s said same-store sales at its Asia/Pacific, Middle East and Africa segment jumped 7.8% last month.
“Giving our customers a unique balance of food and beverage choices is driving performance in every area of the world," CEO Jim Skinner said in a statement. "We're offering new menu items and classic favorites, including premium and value selections, all for our customers to enjoy in our convenient, contemporary restaurants. We intend to continue our momentum by further enhancing the McDonald's experience and giving customers even more reasons to visit."
McDonald’s said its U.S. restaurants benefited from the “ongoing appeal” of its McCafe Real Fruit Smoothies and Frappes. European sales were boosted by outperformance in the U.K. and Russia, which offset weakness in France. Emerging market sales continued to be driven by growth in Japan, China and Australia.
Shareholders didn’t respond well to the August results, sending McDonald’s stock sliding 2.08% to $74.50 ahead of Thursday's opening bell. The stock had rallied 6% over the past four weeks and 22% on the year.
National Semiconductor Corp. (NSM)
National Semiconductor Corp. on Thursday reported a sharp jump in earnings for its first fiscal quarter thanks to strong demand for the company's semiconductor products used in the wireless handset and industrial markets.
However, the chip maker saw its shares dip more than 5% in after-hours trading, as its revenue forecast for the current period came in below Wall Street's estimates.
For the quarter ended Aug. 29, National Semiconductor Corp. (NSM) reported net income of $88.8 million, or 36 cents a share, compared with earnings of $29.8 million, or 13 cents a share, for the same period last year.
Revenue rose 31% to $412 million. The company cited "demand from wireless handset and industrial markets" as the main reason for the sales gain.
Analysts were looking for earnings of 34 cents a share on revenue of $415.6 million, according to consensus estimates from FactSet Research.
Gross margin for the quarter was 70.9% -- which the company claimed as a new record.
"However, in the near term, slower growth in our end markets and distribution channel, along with some likely inventory reduction, will mute the seasonal growth that we would normally see in our business during this time of the year," National Semi CEO Don Macleod said in a statement.
For the current quarter, National Semi said it expects revenue to come in between $390 million and $415 million. Analysts had been looking for revenue of $421.5 million for the quarter, according to FactSet estimates.
The company also said its board of directors increased its dividend by 2 cents to 10 cents per share, payable on Oct. 12.
Smith & Wesson (SWHC)
Smith & Wesson (SWHC) shares gave up as much as 11% after the company reported a first-quarter profit of $6.2 million, or 10 cents a share, on $94.9 million in sales. During the same period a year ago, Smith & Wesson earned $12.3 million, or 21 cents a share on $101.7 million in sales. Analysts surveyed by FactSet Research estimated a quarterly profit of 5 cents a share on revenue of $95.6 million.
The company also forecast second-quarter sales of between $97 million and $102 million, while analysts' had forecast Smith & Wesson to report sales of $115.5 million. Smith & Wesson also said its profit-margin forecast for the second quarter will likely fall to between 25% and 26% from its first-quarter margin of 34%.
Texas Instruments (TXN)
Texas Instruments (TXN) remained near its regular session closing point of $23.84 after giving its midquarter business update.
TI said it now expects to earn between 66 cents and 72 cents a share on revenue in a range of $3.62 billion to $3.78 billion. The company had earlier forecast earnings between 64 cents and 74 cents a share, with revenue in a range of $3.55 billion to $3.85 billion for its third quarter.
Analysts have forecast TI to earn 68 cents a share on $3.7 billion in revenue for the quarter.
Company News and Movements
• Shares of Adobe Systems (ADBE) surged more than 12% after Apple (AAPL) said it will drop restrictions on what programming tools developers can use to create iOS apps. Shares of Apple rose 0.6% after the news.
• Goldman Sachs (GS) rose 1.1% after Britain's Financial Services Authority said the firm agreed to pay a $27 million fine for not disclosing a U.S. government investigation into the the allegedly fraudulent activity of Fabrice Tourre, a London-based Goldman trader.
• Stemcells (STEM), Geron (GERN) and other stem cell research companies rallied after a U.S. appeals court OK’d a White House request for an emergency stay temporarily lifting a ban on federal funding of human embryonic stem cell research.
Crocs, Inc. (CROX)
The shares of Crocs, Inc. (CROX) are attempting to extend their long-term quest for new highs, but have run into a speed bump in the $14 neighborhood – site of the security's multi-year peak tapped about a month ago. While the equity's ascending 10-week and 20-week moving averages could eventually aid the stock in its journey into the black, it appears some options speculators are betting on CROX to remain stagnant or retreat in the short term.
So far today, the footwear concern has seen roughly 2,200 calls change hands – more than twice its expected daily volume of fewer than 800 calls. Most of the attention has centered on the September 14 call, which has seen about 1,100 contracts cross the tape – 94% of which traded at the bid price, suggesting they were sold. In that same vein, the September 15 strike has seen 300 contracts exchanged – all of which crossed at the bid price.
Assuming at least a portion of the out-of-the-money calls were sold to open, we can conclude that the speculators are attempting to capitalize on a near-term respite on the charts.
More specifically, by writing the September 14 and 15 calls to open, the sellers are hoping the shares of CROX remain south of these strikes through front-month expiration, rendering the calls worthless and allowing them to pocket the initial premium collected from selling the options.
The following companies also have some impressive options movements:
Airgas Inc. (ARG) is continuing to fend off the takeover efforts of rival Air Products and Chemicals Inc. (APD).
Airgas on Wednesday rejected Air Products' latest offer, saying $5.5 billion is not an "appropriate value" or "sensible starting point for negotiations."
Airgas also recommended that shareholders reject an APD bid to hold the next ARG annual meeting in January, advancing it by nine months. Airgas, citing advice from two proxy advisory firms, said "pulling the next annual meeting ahead by 9 months would significantly impair the defensive value of the classified board, limiting the board's ability to negotiate the highest offer for shareholders."
APD, meanwhile, said that the advice from Institutional Shareholders Services, is a "serious error."
Options players responded to the news by sending more than 83,700 contracts across the tape on Wednesday. This surge in volume is more than 10 times the stock's average daily trading volume, according to data from WhatsTrading.com. In addition, approximately 64% of the volume changed hands on the put side.
Put trading has been on the rise toward ARG recently. The International Securities Exchange (ISE) has reported 8.9 puts purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 95% of all those taken during the past 12 months, pointing to a rising skepticism.
What's more, the put/call open interest ratio (SOIR) for ARG comes in at 1.36, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 97% of all those taken during the past year. In other words, short-term options speculators have been more pessimistically aligned toward the shares only 3% of the time during the past 12 months.
Wall Street is also skeptical of ARG. According to Zacks, the stock has earned two "strong buy" ratings and nine "holds."
Technically speaking, the shares of ARG are up more than 38% since the beginning of the year. The security has rallied along the support of its 10-week and 20-week moving averages since March 2009, but is now struggling with resistance in the 66 region.
MGM Resorts International (MGM)
Options trading was brisk on MGM Resorts International (MGM) on Wednesday, as more than 61,500 contracts crossed the tape. This surge in volume was nearly three times the stock's average daily trading volume of 21,193 contracts, according to data from WhatsTrading.com. In addition, traders were feeling somewhat optimistic, as 77.5% of the volume changed hands on the call side.
Yesterday's preference for calls runs counter to the trend that has been seen on the ISE. The 10-day put/call volume ratio comes in at 0.98, which is higher than 78% of all those taken during the past 12 months. In others words, pessimism is on the rise toward the shares.
Meanwhile, the SOIR for MGM comes in at 1.36, as put open interest easily outnumbers call open interest among short-term options. This ratio of puts to calls is higher than 89% of all those taken during the past 12 months. In other words, short-term options players have been more pessimistically aligned toward the shares only 11% of the time during the past 12 months.
Finally, Wall Street is giving the gaming company the cold shoulder. According to Zacks, the stock has earned seven "strong buys," 11 "holds," and three "sells."
Since peaking around the 16.50 area in April, MGM has retreated under resistance at its 10-week and 20-week moving averages, but is holding support in the 9 region. The stock is currently sitting on a year-to-date gain of 4.9%.
Symantec Corp. (SYMC) was the center of some heavy options trading on Wednesday, as more than 92,700 contracts changed hands. This jump in volume was more than seven times the stock's average daily trading volume of 11,894 contracts, according to data from WhatsTrading.com. What's more, approximately 77% of the volume crossed the tape on the call side.
Options players have shown a definite preference for calls on SYMC. During the past 10 trading sessions, 28 calls have been purchased to open on the ISE for every one put purchased to open. This ratio of calls to puts is higher than 97% of all those taken during the past 12 months.
In addition, the SOIR for SYMC comes in at 0.58, as call open interest nearly doubles put open interest among options slated to expire in less than three months. This ratio of puts to calls is lower than 91% of all those taken during the past 12 months. In other words, short-term options players have been more optimistically aligned toward the shares only 9% of the time during the past 12 months.
Even short sellers are unloading their bearish bets toward SYMC. During the past month, the number of pessimistic positions dropped by 14% to 17.5 million. This accumulation of bearish bets now accounts for only 2.2% of the company's total float.
Technically speaking, the shares of SYMC are down more than 21% in 2010. The security has been in a steady downtrend under its 10-week and 20-week moving averages since late January. However, the security is in the process of bouncing off support at the 12 level and has climbed above resistance at its 10-week and 20-week trendlines. A weekly close above these moving averages could signal a shift in technical strength in the shares.
Bullish flow detected in Geron (GERN), with 2802 calls trading, or 6x the recent average daily call volume in the name.
Bearish activity detected in SinoCoking Coal and Coke Chemical (SCOK), with 3492 puts trading, or 2x the recent average daily put volume in the name.
Bullish flow detected in VirnetX Holding (VHC), with 3611 calls trading, or 2x the recent average daily call volume in the name.
Increasing volume is also being seen in Las Vegas Sands (LVS), XL Capital (XL), and Patriot Coal (PCX).
All three major indexes started the month with a bang following a series of stronger-than-expected economic reports. But this week, trading has been a bit shaky, with little on the docket to push stocks forward.
Stocks closed higher Wednesday as worries about European banks eased, and investors welcomed President Obama's $350 billion jobs recovery plan.
Even though the rally has been mostly on light volume due to the holiday-shortened weeks, stocks continue to sizzle in September amid hopes that August's double-dip worries may have been overblown. The Dow has jumped 400 points so far this month, bringing the benchmark index nearly back to the flatline on the year.
The latest gains were driven by the stronger-than-expected jobless claims report and new data showing the U.S. trade deficit took its biggest drop in 17 months thanks to solid export growth.
“There has been a pretty significant reversal in the risk trade in the marketplace,” said Craig Peckham, equities trading strategist at Jefferies & Co., citing rising oil prices and Treasury yields. “It all points to a market that is slowly but surely regaining confidence. The claims data is the latest point to support that.”
The choppy day on Wall Street came after the markets closed modestly higher on Wednesday in the wake of a solid bond auction in Portugal that eased the markets' European sovereign debt concerns.
The Dow had already jumped 3.7 percent in September heading into trading Thursday. Stocks have climbed all but one day so far this month. Major indexes took a pause from the recent rally on Tuesday when worries about European government debt problems flared up early in the week.
There were concerns during the spring that mounting European debt would stunt a global recovery. Stocks fell sharply through much of the spring because of those worries.
Those worries largely dissipated after several European nations successfully auctioned new debt this week. However the Deutsche Bank report, which came out after European markets closed, could again renew questions about whether banks there could handle losses if government's default.
"The market is showing signs of a bull flag," said Nick Kalivas, vice president of financial research at MF Global Inc.
"The recovery is not falling apart and continued growth is the most likely outcome," said Zach Pandl, economist at Nomura Securities International in New York. "This is generally a bond negative and positive for stock prices."
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