Monday saw the stocks close at their highest level in more than four months on Monday, one day ahead of a Federal Reserve meeting, as encouraging financial and home builder earnings boosted confidence in the economic recovery.
Bulls’ bid to extend a three-week winning streak was also helped after the group in charge of dating the starts and ends of economic downturns declared that the U.S. recession ended last summer.
“It doesn’t mean growth is robust, but it is growth,” Paul Nolte, managing director at Dearborn Partners, said of Monday’s declaration by the National Bureau of Economic Research that the longest U.S. recession since World War II ended in June 2009.
Stocks extended their September bull run today, as the Street cheered news of an official end to the recession. While the data from the National Bureau of Economic Research (NBER) merely confirmed what many investors had already assumed, the reassuring news allowed the bulls to essentially shrug off a dismal dose of housing statistics.
More specifically, the National Association of Home Builders said homebuilder confidence remained at an 18-month low in September, though a stronger-than-expected earnings report from sector component Lennar Corp. (LEN) helped to soften the sting. Against this backdrop -- and ahead of the Federal Open Market Committee's (FOMC) monetary-policy announcement tomorrow -- the major market indexes settled yet another session comfortably north of the breakeven line.
In fact, "the S&P 500 Index finally broke out above the critical 1,130 level," noted Schaeffer’s Senior Technical Strategist, Ryan Detrick. "We've been expecting this to happen for some time now, and you can't argue with the price action." What's more, Detrick said, even the longer-term bonds market showed signs of strength today. "At least since the 'flash crash,' bonds and stocks have trended inversely," he reflected. "With the Fed's decision on interest rates coming up tomorrow, it seems like everyone decided to put their money to work today."
While driven by energy and consumer discretionary stocks, the latest burst of buying on Wall Street didn’t appear to be triggered by any new groundbreaking developments. Instead, the bulls cheered on the S&P 500 breaking out above the closely-watched 1131 level, stronger-than-expected earnings from home builder Lennar (LEN) and Discover Financial (DFS) and a new report declaring the recession officially ended in June 2009.
Still, some market watchers were surprised by the strength of Monday's rally, especially because it comes in the wake of a surprisingly strong month of September on Wall Street. Up 8.9% this month, the broad S&P 500 is on track for its best September since 1939 and it closed on Monday at its highest level since May 13. “I am definitely a little bit puzzled by the move, outside of the technicals here,” said Nick Kalivas, vice president of financial research at MF Global. “People were positioned for a terrible September. But the economic news has been a little more stable and there has been a pick-up in M&A. These things have combined to catch the markets leaning the wrong way."
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,753.62) finished with an excellent gain of 145.77 points, or 1.37%.
The S&P 500 Index (SPX – 1,142.71) also had a very good gain, on the day, of 17.12 points, or 1.52%.
The Nasdaq Composite (COMP – 2,355.83) fared the best of the three major indexes, with a big gain of 40.22 points, or 1.74%.
The Russell 2000 Index of smaller companies had a big gain of 18.54 points, or 2.85%, to settle at 669.98.
Nearly every single stock that makes up the benchmark index closed in positive territory, led by financial giants JPMorgan Chase (JPM), Bank of America (BAC) and American Express (AXP). The index's worst performers were Intel (INTC) and Cisco Sytems (CSCO).
Two of the strongest-performing sectors Monday were consumer discretionary and energy stocks, each of which benefited from the more upbeat mood on the economy. Leading the way higher in the consumer discretionary sector was Office Depot (OD), which surged 10% in the wake of a positive analyst note from Janney Montgomery Scott.
Energy stocks like Hess (HES) rallied as crude oil jumped $1.20 a barrel, or 1.63%, to $74.86.
Volume was light with about 7.16 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. Recent days have seen weak to moderate volume, and traders are looking for a pick-up in trading to confirm the market has made a convincing breakout.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of about five to one, while on the Nasdaq, advancers beat decliners by more than three to one.
Notes of Interest
• The Dow Jones Industrial Average (DJIA) finished the session north of the 10,700 level for the first time since mid-May.
• The S&P 500 Index’s (SPX) settled atop the 1,130 level for the first time since May 17.
• The Nasdaq Composite (COMP), the tech-rich index, ended the session north of the 2,320 level – a feat not accomplished in more than four months.
• Crude futures halted a four-session losing streak today, as official word of an end to the recession bolstered hopes for revived demand. Furthermore, some analysts speculated that seasonal trends are starting to contribute to oil's momentum, with investors looking ahead to the peak heating season. Against this backdrop, crude oil for October delivery added $1.20, or 1.6%, to finish at $74.68 per barrel.
• Gold futures continued their quest for record highs today, as traders looked ahead to tomorrow's FOMC's policy announcement. With some investors bracing for news of monetary and quantitative easing from the central bank, the malleable metal defied a stronger dollar and a positive day in the equities market, with December-dated gold futures adding $3.30 to finish at a record $1,280.80 an ounce. Earlier in the session, the front-month contract rallied as high as $1,285.20 an ounce.
• Bonds: The price on the 10-year Treasury note was slightly higher, pushing down the yield to 2.71% from 2.75% late Friday.
The SPX Breakout
The S&P 500 (SPX) closed at a four-month high on Monday as a long-awaited break above a technical range and a flurry of positive corporate news increased investor optimism.
The break came a day before a Federal Reserve meeting in which the central bank is expected to renew a promise to keep its portfolio from shrinking but is not seen taking new steps to ease monetary policy.
The S&P 500 has struggled to make a sustained move above 1,130, which has been the upper end of a range that has persisted since June. Monday's gains could be a shot in the arm if it sways institutional investors that September's rally of 8.9 percent by the benchmark S&P index has further to go.
"We've been waiting for this level to be penetrated, and breaching it makes it hard to be too negative right now," said Frank Gretz, market analyst and technician at Shields & Co in New York.
The S&P broke above a short-term resistance level of 1,140, the 61.8 Fibonacci retracement of its 2010 high-to-low slide.
Is the S&P 500 Index (SPX) headed for 1,300? Analysts at Citigroup think so. In a research note today, the brokerage firm explained, "Stock market investors could enjoy an aggregate total return of roughly 20 percent in the next 15 months or so," thanks to affordable valuations and improving investor sentiment. Citigroup maintains a 2010 year-end target of 1,175 points for the SPX, and a 2011 year-end target of 1,300.
The SPX is on the right track so far, with the broad-market bellwether adding nearly 11 points, or roughly 1%, in today's session. The index recently scrambled above its 200-day moving average, and it's currently poised to notch a daily close above resistance at 1,130 for the first time since May 17.
"The S&P has tried to sit above the 1,130 level in June, August and last week but failed, so the fact that it has broken up above that point and is staying there is considered a positive sign for the bulls and forcing traders to come back in," said Donald Selkin, chief market strategist at National Securities.
NAHB Housing Market Index
Homebuilder sentiment unexpectedly held steady in September, according to a survey on Monday that pointed to a still-weak housing market.
The National Association of Home Builders/Wells Fargo Housing Market Index was unchanged at 13, matching last month's level, which was the lowest since March 2009.
Economists polled by Reuters expected a rise to 14.
A reading above 50 indicates that more builders view sales conditions as good than poor. The index has not been above 50 since April 2006.
The NAHB survey showed the current sales conditions gauge for single-family home sales remained unchanged at 13 after August was revised a point lower, which was the lowest level since April 2009. The sales expectations measure for the next six months remained unchanged at 18.
The traffic of prospective buyer’s index fell a point to 9, the lowest level March 2009.
"Housing is a zombie market," said Joseph Saluzzi, co-head of equity trading at Themis Trading. "The housing index reading today was horrible, but the stock market is reacting positively, meaning that investors are looking for more stimulus."
But Saluzzi warned that if the gains aren't sustained for several sessions, stocks could edge down since market fundamentals are pointing lower.
"Any rally that is induced by stimulus is not sustainable," Saluzzi said. "I think you have the let the cycle play through."
In fact, trading could drift back into choppy waters this week as investors return their focus to more economic news on the housing market.
"We've been waiting for this level to be penetrated, and breaching it makes it hard to be too negative right now," said Frank Gretz, market analyst and technician at Shields & Co in New York.
The National Bureau of Economic Research said that the longest recession since World War Two officially ended in June 2009, though that didn't mean the economy had "returned to operating at normal capacity."
The bureau's announcement "is a nice shot in the arm, psychologically, since it suggests more progress than some parts of the market had allowed for," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. "It suggests an opening of potential going forward."
"I think it was known that the recession ended then, but maybe the official announcement gives people some needed assurance," said Donald Selkin, chief market strategist at National Securities.
In currencies, the dollar fell against the euro and the Japanese yen, but rose slightly against Britain's pound.
European Markets: closed with strong gains. Britain's FTSE 100 jumped 1.7%, the CAC 40 in France rose 1.8%, and Germany's DAX added 1.4%.
Asian Markets: The Hang Seng ended modestly higher, while the Shanghai Composite edged lower. Japanese markets were closed for a holiday
Company Earnings Reports
Discover Financial Services’ (DFS)
Discover Financial Services’ fiscal third-quarter profit dropped 74% following a year-earlier legal gain, but earnings handily topped analysts’ expectations as loan problems eased notably from the spring.
Shares were up 3.5% in recent premarket trading Discover (DFS), both a lender to cardholders and a processor of transactions, continued to benefit from falling delinquencies and lower loan-loss provisions. Card-sales volume rose for the fourth-straight quarter. Meanwhile, the industry faces increased consumer protective measures, including rules cutting late-payment fees that could cut issuers’ revenue by billions annually.
Friday, the company agreed to acquire private student-loan operations of Student Loan Corp. for $600 million and $4.2 billion of the company’s assets for 91.5 cents on the dollar. The company has been ramping up its business in personal and private student loans, seeking revenue growth.
For the quarter ended Aug. 31, Discover posted a profit of $260.6 million, or 47 cents a share, down from $577.5 million, or $1.07 a share, a year earlier, which included an 82-cent gain from its antitrust deal with Visa Inc. (V) and MasterCard Inc. (M) .
Analysts polled by Thomson Reuters most recently predicted earnings of 38 cents for the latest quarter.
Discover’s card business saw profit jump 81% as card-sales volume rose 5%. Net charge-offs, or loans the company doesn’t expect to collect, dropped to a better-than-expected 7.18% from 8.4% a year earlier and 7.97% in the prior quarter.
Delinquencies of 30 days or more were 4.16%, down from 5.11% a year earlier and 4.52% in the second quarter.
Provision for loan losses dropped on an adjusted basis to $712.6 million from $1.09 billion and $724.3 million, respectively. Last month, fellow lender-and-processor American Express Co. (AXP) said its latest-quarter earnings nearly tripled as customers increased spending by 16%.
Lennar Corp (LEN) (click for further details)
Company News and Movements
• IBM (IBM) was among the top boosts to the Dow after it agreed to buy Netezza Corp (NZ. ) for $1.7 billion in the latest in a string of large tech deals. Shares of IBM rose 1.2 percent to $131.78.
• BP (BP) announced it permanently killed the oil well in the Gulf of Mexico that caused the worst spill in U.S. history. The U.K. oil major said its costs related to the spill should start to decline.
• Hewlett-Packard (HPQ) is edging closer to naming a new CEO, and is leaning toward tapping an insider to succeed former CEO Mark Hurd, The Wall Street Journal reported. H-P is reportedly considering Palm (PALM) CEO Todd Bradley, Ann Livermore, who oversees the server and services business and Dave Donatelli, who helped lead H-P’s bidding war for 3PAR (PAR).
• International Paper (IP) declined 6% amid concerns about a trade magazine restating its prices for containerboard. Pulp & Paper Week magazine reversed its earlier report of prices increasing by $40 a ton in August.
• Verizon Communications (VZ) appointed James McAdam as the telecom giant’s new president and chief operating officer, paving the way for him to succeed CEO Ivan Seidenberg, who turns 64 later this year and is expected to step down in 2011. McAdam, currently the president and CEO of Verizon Wireless, will take his new position on October 1.
ValueClick, Inc. (VCLK)
It's safe to say that Wall Street isn't too fond of ValueClick, Inc. (VCLK). Zacks reports that the stock has earned just five "strong buy" ratings, compared to a dozen "holds" and one "strong sell." Likewise, VCLK's average 12-month price target of $12.17 represents a fractional discount to Friday's close at $12.31, suggesting that very few analysts are expecting the stock to rise during the long term.
But it's not just analysts who are betting against VCLK. Options players are favoring puts by an overwhelming margin, as evidenced by the stock's put/call open interest ratio (SOIR) of 4.70. Not only does this lofty ratio reveal that puts outnumber calls by nearly five to one among options set to expire within three months, it also ranks higher than 100% of other such readings taken during the past year. In other words, short-term options traders are more bearishly aligned toward the shares now than at any other time within the previous 12 months.
Short sellers have also boarded the bearish bandwagon. Short interest on VCLK rose by 6.2% during the most recent reporting period, and now accounts for 10.4% of the security's float. At the equity's average daily volume, it would take more than a week's worth of trading for all of these bearish bets to be covered.
Given this heavily pessimistic sentiment backdrop, it's no surprise that VCLK is sharply higher today on the heels of a rare bullish analyst note. Bright and early this morning, Benchmark raised its rating on the stock to "buy" from "hold," and simultaneously hiked its price target to $15 from $11.
In a note to clients, analyst Clayton Moran cited Google's (GOOG) newly launched Instant Search functionality as a bullish catalyst for VCLK. "Our analysis and channel checks into Google Instant have shown an increased importance for retail keyword terms related to 'coupons' and 'promotions,' due to Google Suggest," the analyst explained. "We believe affiliate marketers may experience a surge in traffic and sales."
VCLK gapped higher as a result, with the stock jumping as high as $13.46 in intraday action -- just pennies shy of its current annual high of $13.94. The shares have performed quite well in 2010, adding nearly 22% year-to-date -- easily outpacing the 2% gain collected by the broader S&P 500 Index (SPX).
Thanks to today's brokerage-induced bullish gap, the stock is now trading well north of support at its 10-day moving average. However, VCLK could find a temporary backstop in the $12.50 to $13 neighborhood, which marks the site of today's early jump.
Bears were clearly caught off-guard by today's upgrade, which bodes well for VCLK. A rush to cover by uneasy shorts could help the shares continue their positive momentum, and the stock certainly has plenty of sideline cash available to fuel such a rally.
However, Wall Street might not let VCLK off the hook so easily. As if to counter this morning's bullish note, S&P Equity just slashed its rating on the stock to "strong sell" from "sell," citing the stock's valuation as a point of concern. Indeed, with VCLK trading well north of its average 12-month price target, additional valuation-related downgrades are a risk to the stock's progress during the short term.
The following companies also had some impressive options movements :-
Agrium Inc. (AGU)
Agrium Inc. has been on fire lately, marching steadily higher since July. Throughout this time, AGU has enjoyed strong technical support from its ascending 10-week moving average. The agriculture issue has tagged a fresh string of new highs during the past few weeks, with today being no exception: this morning AGU hit a fresh 52-week peak of $76.06.
Option players have flocked to this technical outperformer today, with nearly 3,000 contracts changing hands so far -- triple AGU's expected single-session volume. Calls have been exceedingly popular, with 2,289 of these bullish bets changing hands.
Most popular -- by far -- has been the October 75 call, with 1,590 contracts traded. What's more, the majority of these calls crossed the tape at the ask price, indicating they were likely purchased.
Despite today's bullishly biased activity, option players remain relatively complacent toward the shares. AGU's put/call open interest ratio (SOIR) -- which measures put open interest relative to call open interest among options in the front three months -- ranks at 0.80, in the middling 51st annual percentile. As AGU continues its uptrend along solid technical support, a migration toward the bullish end of the spectrum could help the stock continue its quest for new highs.
AOL, Inc. (AOL)
AOL, Inc. (AOL) has been an early favorite among put traders today, with speculators showing a preference for October-dated puts, which assumed front-month status after the closing bell on Friday.
So far, the Internet services issue has already seen nearly 1,100 puts cross the tape – about 29 times its expected daily volume. Nearly all of the activity has centered on the October 20 put, which has seen 1,030 contracts change hands – 97% of which have traded at the ask price, suggesting they were bought.
However, with more than 4,500 puts already docked at the round-number strike, we can't yet determine how much of today's volume will translate into freshly purchased bearish bets.
If the latest trends on the International Securities Exchange (ISE) are any indication, though, we should see a notable spike in front-month put open interest overnight. AOL currently sports a 10-day ISE put/call volume ratio of 0.84, which ranks in the 86th annual percentile. In other words, traders on the ISE have bought to open AOL puts over calls at a faster clip just 14% of the time during the past year.
In that same vein, short sellers have increased their stake in the stock, too, with short interest advancing by 7.7% during the most recent reporting period. Now, these pessimistic positions account for 5.8% of the equity's total available float -- an accumulation that would take nearly eight sessions to unwind at AOL's average daily trading volume.
Technically speaking, AOL has outpaced the broader S&P 500 Index (SPX) by almost 9% during the past 40 sessions, and is in position to finish north of the $23.50 level for the first session since mid-May. A continued run higher could shake loose some of the weaker bearish hands, which could lure even more buyers to the stock's bandwagon.
**Bearish activity detected in Skyworks Solutions (SWKS), with 6491 puts trading, or 3x the recent average daily put volume in the name.
**Bullish flow detected in Manitowoc (MTW), with 5135 calls trading, or 4x the recent average daily call volume in the name.
**Bullish flow detected in EBIX, with 2450 calls trading, or 2x the recent average daily call volume in the name.
**Increasing options volume is also being seen in TIVO, MGM, and International Paper (IP).
The Dow's triple-digit rally was its best daily gain since surging 255 points on September's first trading day. Since tumbling to 9686 in July, the blue chips have soared 11% and are off just 4% from their 2010 high that was set in April.
The buying on Wall Street gained momentum Monday morning as the S&P 500 climbed solidly above the 1131 level, which had been a key area of resistance for months and was closely watched by technicians.
“It looks now like we’re going to be on a race for 1150, which is the next bout of resistance,” said Paul Nolte, managing director at Dearborn Partners.
However, some market watchers were preaching caution, saying the markets are due for at least a short-term pullback from their recent surge. "We have a trend that has definitely been very, very positive and broad-based. The trend is higher,” said Peter Kenny, managing director at Knight Capital Group.“If you’re not selling into this rally, you’ve leaving yourself exposed to a sudden downdraft. Any rally that has lasted three weeks over the past year has been subject to very sudden shifts.”
Wall Street has also begun to set its sights on the Federal Reserve, which is set to begin a two-day policy meeting on Tuesday. The central bank isn’t likely to raise interest rates amid the sluggish economy, but it could update its economic forecast and announce new measures aimed at aiding the recovery.
Monday’s lone economic report produced little reaction in the markets. The National Association of Realtors said its home-builder sentiment index unexpectedly stayed in September at an 18-month low of 13.
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