Volatility rose this morning as stocks ricocheted back and forth between bullish and bearish headlines. A small parade of economic data was nearly overshadowed by comments from Federal Reserve Chairman Ben Bernanke and earnings reports from Google and General Electric. Unfortunately an unexpected decline in consumer sentiment is raising worries about the economy. The market is seeing an oversold bounce in the U.S. dollar, which has sparked some minor profit taking in commodities. Crude oil is down -1.4% to $81.53 a barrel. Gold futures are down -0.4% to $1,372.00 an ounce. We are even seeing some profit taking in the bond market with a dip in bonds lifting the yield on the 10-year note to 2.549%.
Trading overseas was mixed. The Chinese Shanghai index surged +3.1% on Friday. For the week the Shanghai delivered a +8.4% rally, posting its best weekly performance in 18 months led by strength in banking stocks. The Hong Kong Hang Seng slipped -0.4% after setting new two year highs on Thursday. In Japan the NIKKEI index pulled -0.8% after a strong two-day bounce. Stocks in Europe initially sold off on the disappointing consumer sentiment figures in the U.S. but markets managed to pare their losses by the closing bell. The French CAC-40 rose +0.2%. The English FTSE lost -0.4%. The German DAX set another two-year high with a +0.5% gain.
On the earnings front Google (GOOG) and General Electric (GE) were topping headlines. Shares of GOOG delivered their biggest one-day gain in two years with a gap open this morning. The stock is still up +11% on the session following a much better than expected earnings report. Wall Street was expecting a net profit of $6.68 a share. GOOG said profits rose +32% to $6.72 a share. Revenues came in above expectations at $5.48 billion for the quarter. GOOG is now testing prior resistance near the $600 level. Moving the opposite direction was GE with a -5% decline and a breakdown under its simple 200-dma. GE delivered a profit of 29 cents a share, which beat analysts' estimates for 27 cents but revenues were disappointing with a -5% decline to $35.9 billion for the quarter.
Chart of the Google (GOOG):
Chart of General Electric (GE):
One of the biggest disappointments today was the University of Michigan's consumer sentiment survey. Economists were expecting sentiment to improve from 68.2 in September to 69.0. Instead sentiment slipped to 67.9 for the preliminary October reading. The gauge of current economic conditions has fallen to its lowest level since November 2009. Consumers plans for future buying were also on the decline. This is a bearish report but we're not actually seeing any pullback in consumer spending yet. The Commerce Department reported this morning that retail sales in September came in better than expected. Economists were expecting a +0.4% increase in retail sales following a +0.4% increase in August. The government has revised August to +0.7% and claims that purchases rose +0.6% in September.
The markets were also digesting data from the CPI and Empire State survey. The Labor Department reported this morning that the Consumer Price Index, one of the widest measures of inflation at the consumer level, was very mild. After two months of +0.3% gains the CPI came in at +0.1%. The core CPI, which excludes more volatile food and energy prices, came in unchanged for the second month in a row. This is borderline deflationary. For the last twelve months the core CPI has only increase +0.8%, which is the smallest year-over-year gain in almost 50 years. These numbers would suggest the Federal Reserve has no need to fear inflation, in spite of surging commodity prices.
One of the most encouraging reports today was the New York Fed's Empire State manufacturing survey. Numbers over zero indicate growth and expansion and economists were expecting the Empire State survey to rise from 4.1 in September to 6.0 in October. This morning the index came in at 15.7, the highest reading in four months and a significant improvement over the recent trend of fading manufacturing data.
Speaking of the Fed, the Federal Reserve chairman Be Bernanke was making headlines again as he spoke in Boston on Friday morning. Rising expectations that the Fed would launch a new quantitative easing program were reaffirmed again with Bernanke's comments that there is a need "for further action." Bernanke went on to say that inflation can actually be "too low". Many believe that the Fed will announce a new QE program at their two-day meeting in early November. The challenge now is that this move has already been baked into the market and some analysts are suggesting that even an announcement of a $1 trillion QE program may not have any impact.
In other news banking stocks continue to accelerate lower as investors question how much risk the banks truly face with this country's foreclosure problem. Major lenders like Bank of America (BAC) and J.P. Morgan Chase (JPM) have temporarily halted foreclosures as they review their repossession process. All 50 states are currently investigating if there has been systemic fraud within the foreclosure process. There is a rising fear that if the original mortgages were fraudulently given the wrong investment grade before sold to investors in bundles of mortgage-backed securities that the big banks might have to buy them back, which would cost tens of billions of dollars. At the same time, if foreclosures are halted, that means these bad loans will stay on the bank's books a lot longer. Both the BIX and BKX banking indices are down -2.2% or more following yesterday's declines.
Chart of BIX banking index:
Overall the market is holding up pretty well. Negative headlines this morning appear to have been canceled out by positive headlines. For the most part stocks are churning sideways. The major indices remain overbought and due for a correction but there seems to be a reluctance to hit the sell button.
Chart of the S&P 500:
Chart of the NASDAQ:
Chart of the Russell 2000 index: