GE, YHOO, MOT, MSFT! Pick your favorite reason for the market rally. Positive earnings news from each helped to overcome the negative news from the past week and power the Dow to a solid gain and a close well over resistance at 10400. "Curbs in to the upside" is not something we have heard often in the last several months. Shorts must experiencing a huge headache brought on by the need to cover and cover quickly. This is even more distressing for them considering Argentina is getting closer to imploding as each minute passes. What would be a normally be the mother of all shorting opportunities turned into the father of all short squeezes!
Where to begin? The news events are flying faster than mosquitoes in Minnesota and there is no way to cover them all. The short squeeze began after the close on Wednesday with an announcement by Microsoft that it was changing license requirements to allow resellers to remove the Explorer icon from the Windows desktop on future systems sold. This is equivalent to closing the barn door after the horses already escaped but it is the first in probably many steps that will bring them into the good graces of the Justice Dept. A settlement is looking like a sure thing and investors celebrated with a +5.10 gain for the day. After the close they announced a settlement with New Mexico. In a statement, New Mexico Attorney General Patricia Madrid called for a speedy resolution of the case and warned against trying to extract a penalty that could have far-reaching and detrimental effects on consumers and businesses. "I am no longer persuaded a break-up remains appropriate or will ultimately be ordered by the courts," Madrid said. With statements like this can a settlement be far away? MSFT also said sales would exceed estimates for the quarter putting aside any worries of an earnings miss.
SunMicro is rumored to be in talks to sell Hitachi Data Systems storage products. This powered SUNW to a +10% gain and helped add points to the Microsoft juiced Nasdaq index.
Motorola said that the slow down in some areas of their business were coming to an end. After posting their first loss since 1985 Motorola said the restructuring was beginning to show results and cell phone sales were showing early signs of recovering. MOT spiked +16% on the news and was the main factor in the semiconductor index recovery on Thursday.
Yahoo! beat the street by a penny with earnings of a penny but the street was encouraged that the damage was not any worse. A year ago YHOO earned nine cents. Beating estimates that had already been lowered twice was not a spectacular event but investors were looking for anything to cheer about. Even less, they said they did not see a pickup in advertising until the middle of next year. YHOO gained about +8% but provided a bigger help to overall sentiment.
GE announced earnings which were inline with estimates even though revenue dropped slightly to $31.98 billion from $32.86 billion. Even though Jack Welch said the U.S. was in a definite recession, regardless of what the economic numbers showed, GE reaffirmed their numbers for the full year. GE gained +2.39 to $47 after hitting a three month low of $44.30 on Wednesday.
Harley Davidson said they were upping production targets by +12% and building a new plant in York PA. The economy cannot be too bad if they can sell all they can make at huge prices. Wal-Mart said same store sales jumped +6.9% which was more than the +5.9% from last year. This spiked a rise in retailers after a series of bad news recently.
After the close today Juniper announced earnings that beat the streets lowered estimates and while not overly optimistic about the current business environment they did think revenue would not fall any further. They beat the same period last year by +80%. Analysts think flat visibility means things are looking better and the bottom in tech spending may have arrived. JNPR gained almost $4 on the day to $28.50 and spiked over $30 in after hours.
Rambus also announced earnings which met the streets lowered estimates of four cents. Unfortunately the many royalty suits currently in progress will cap earnings for the next three quarters at zero. Things are not looking up for RMBS right now and the +13% gain during regular trading was erased in after hours.
AMD said they gained market share from Intel in the last quarter but that share was hard fought. Average selling prices were down but they are confident that they will continue to gain share going forward. While Q3 does not look exciting they do expect a return to solid profits in the fourth quarter if seasonal buying patterns hold true. AMD was up slightly in after hours. AMD said the drop off in business was the worst they had ever seen.
The good news was great and the bad news was not that bad! This is as good as it gets for bulls who have been beaten severely in recent sessions. The positive sentiment rallied Dow component IBM to a +3.40 gain and seemingly erased fears that they would miss earnings estimates. Added to the $5.10 gain by MSFT, WMT +3.00, UTX +2.70 on the GE news as well as gains by all but six Dow stocks it was a great day. However, as we all know we did not close Wednesday on a strong note at 10238 so the odds are that few people were able to capitalize on it.
The trading patterns on Thursday were strongly suggestive of serious short covering, not a flood of new buyers coming into the market. The gap up at the open on the MOT/MSFT news was a result of those short the semiconductor index or a chip stock component. With good news from Motorola, the poster child for mismanagement and bad product mix, those short chips feared the worst from AMD/RMBS tonight. Get flat quick would have been the mission. With MSFT announcing that profits were going well and making concessions in advance the Nasdaq was ready to rock at the open. The SUNW - Hitachi rumor only fueled the flames. QCOM soared on the Motorola news and added +6.91 points. It was reaction trading with huge gap opens. The Dow gapped to resistance at 10400 and traded on both sides of that level for hours. Shorts again tried to establish positions and when there was no afternoon sell off they were knocked for another loss as short covering started again. The Nasdaq was a mirror image at 2050 until shortly after 2:PM when the positive sentiment and a lack of a sell off prompted new buyers to come off the sidelines. The S&P-500 shot to 1200 at the open and struggled until just before the close.
Do you see the pattern here? Dow 10400, Nasdaq 2050, S&P 1200. All serious resistance levels and all served as price magnets during the day as bears kept repeating "what about Argentina?" and bulls kept saying "the earnings are not as bad as we thought." Afraid of being on the wrong side of the PPI on Friday morning the bears surrendered and covered. The bears could not get an economic break. The jobless claims soared to 445,000 and the highest number since 1992. The number was seen on the surface to be even more ominous since last week only had four days. Nearing the 450,000 recessionary level you would have expected the markets to tank, or so the bears thought, but analysts were quick to grab an excuse to justify a positive spin. The excuse? They blamed it on the retooling at auto plants which normally occurs during this time period. My question? If it "normally" occurs in July then why were the estimates not higher to take this into account? Investing minds want to know! Quick to capitalize on the positive spin were expectations that the Fed will be forced to cut another 50 points in August to offset not only jobs and consumer confidence but Argentina as well.
What is a bear to do? We can't feel sorry for them since they rode the recent dips down over -1000 points on the Dow since May-22nd and -400 points on the Nasdaq. Austin and the IndexSkybox team have been knocking off some decent bucks on the down side as well. Now, where do we go from here? Friday should be interesting after the AMD, JNPR, EFII earnings and positive comments. There has got to be thousands of discussions underway around the country on investment direction. Investment, not trading direction. There is still a huge amount of money on the sidelines, nearly $6 trillion by some accounts, and this is not trading money. If everyone starts thinking the worst is over then the buying could begin. Most are probably thinking tonight that Thursday could be a one day wonder with Argentina still a weekend wildcard. I would bet on Monday as the day to think about re-entering the market. I would assume many others are thinking the same thing. If Friday holds and nothing happens in the currency markets over the weekend then maybe we really have seen the bottom and its "buying time" again. The earnings reports are going just like I speculated last week. The warnings of gloom and doom were painted with the biggest brush possible to protect companies from missing the actual numbers. Now the actual earnings are not as bad as they were painted thus the upside surprises.
While the good news has been better than the bad news we have to realize that investors were looking for ANY light in the tunnel. Abbey Joseph Cohen went public again after the close with her Dow 12500, S&P 1550 year end targets in an attempt to describe that light in the tunnel as something besides a train. All of these things help but an unexpected miss by a headliner like IBM could instantly change the sentiment landscape. The decisions to cover shorts were made in the face of soaring futures and positive press. Traders tonight are taking a deep breath and looking at the damage from any busted trades and deciding if the original premise for the short still exists. Investors who jumped into the rally today are reconsidering their moves in light of the after market news. Both groups will trade differently on Friday than they did in the market explosion that occurred on Thursday. Option premiums exploded with the market and need to deflate before going long. Be patient, but nibble if you must. The best case could be stocks a couple dollars higher on Monday. The worst case could be a South American meltdown and a new "buying opportunity." You decide which risk you are willing to take.
Enter passively, exit aggressively!