Buckle Up, Baby
The week ahead is going to be a wild one. Second-quarter earnings are in full effect, Greenspan appears mid-week and option contracts expire Friday. Whoa, welcome volatility. The earnings picture Monday morning was painted with a lot of colors and viewed with mixed perceptions. Citigroup (NYSE:C) reported profits that beat consensus estimates by one penny, and although its shares ended modestly higher, they lost the majority of earlier gains as the day wore on. Bank of America (NYSE:BAC) also reported earnings that beat expectations, but its shares weakened throughout the day, similar to the trading in shares of Citi.
The late day weakness in the aforementioned banking shares was perhaps partially a product of the earnings shortfall of Bank of New York (NYSE:BK). The company missed consensus estimates by one penny, and provided cautious guidance for the remainder of the year due to the global economic weakness. Its shares shed 13 percent.
The KBW Bank Sector Index (BKX.X) finished rather poorly Monday, which may be indicative of further downside in the bank sector, thus the broader market as measured by the S&P 500 (SPX.X) In fact, a few of us in the office this morning were mulling the probabilities of shorting some weak bank stocks...To digress, I can't emphasize enough that the bank/finance sector is ultra critical to the broader market, and should serve as a leading indicator. In fact, a trader might do well to monitor the BKX in conjunction with bond yields to get a feel for the supply and demand dynamic in the market. The BKX settled near its day lows Monday and meaningful support now lies around the 870 level, while the 900 level on the upside should serve as resistance.
What the bank sector is to the broader market, the Philadelphia Semiconductor Sector (SOX.X) is to the Nasdaq. The SOX steadily declined throughout Monday's session in the wake of cautious comments from Merrill Lynch chip analyst Joe Osha. The selling of semi stocks was perpetuated by cautious guidance delivered by an Applied Materials (NASDAQ:AMAT) executive out west at the Semicon West Conference, which is a large gathering of chip businesses. The conference should continue to produce guidance, in one form another, as the week progresses.
After the bell, Novellus Systems (NASDAQ:NVLS) - a chip equipment maker akin to AMAT - reported earnings that beat previously lowered estimates, but delivered guidance that was less than positive. In essence, Novellus stated that they weren't sure whether or not the bottom had been reached in their business and remained cautious going forward. The stock dropped another $1.50 in the after hours session, and dragged alike chip shares lower.
The SOX should gap lower Tuesday morning off of Novellus' guidance, depending upon how the sell-side of Wall Street paints the picture. The SOX is below most meaningful support levels, but does have some minor support between the 540 - 550 range. Of course a convincing breakdown below that level could offer bearish traders the green light to get short weak chip stocks and should portend further weakness in the Nasdaq Composite (COMPX). But keep in mind that Intel (NASDAQ:INTC) - the mother of all chip companies and about 6 percent of the Nasdaq-100 (NDX.X) - reports after the bell Tuesday.
The weakness in the SOX dragged the COMPX back towards the psychological 2000 level. The COMPX remains a bit of a conundrum in its recent range, unless you've been shorting strength and buying weakness. With the COMPX, keep in mind that it has an unfilled gap down to the technically significant 1975 support level, which looks like it's going to get filled this week without some help from corporate America.
The S&P 500 is also approaching a key support level at 1200. Actually, it's already there. The S&P has traced a pattern of lower highs and lows since late May, like the rest of the major market averages, and could be setting up to take out its lows between the 1170 - 1180 range. In terms of overbought versus oversold, the S&P is in neutral territory. Therefore, it's certainly possible that it could take out its relative lows, giving traders opportunities for profits on the short side in weak sectors.
Also worth noting, as it pertains to the broader market, is the continued slide in bond yields. On balance, yields continue to fall as bonds are bought, which could translate into less demand for equities. The 30-year Treasury Bond YIELD (TYX.X) is approaching a key support level, so bullish and bearish traders alike may want to monitor its action this week as it relates to equities.
The Dow Jones Industrial Average (INDU) may also be having trouble due to bond yields. It has stalled around the 10,550 level in the past two trading days, and on balance is having difficulty around the 10,500. That much is not surprising given the fact that 10,500 provided substantial support on the way down. Should the Dow continue to act heavy around the 10,500, it is likely to roll back down towards 10,250 in the short-term. Conversely, the 'right' catalyst could propel the index above the 10,550 range and catch some shorts off guard.
Aside from corporate earnings this week, perhaps Greenspan's appearance Wednesday could serve as a positive catalyst. The Fed Chairman is scheduled to give his semi-annual state of the economy testimony before Congress Wednesday morning. Market participants will be listening for guidance from the Doc on the current state of the U.S. economy, the Fed's forecasts on growth and inflation and, perhaps most importantly, the Fed's future actions on interest rates. Therein lies possible catalysts, but whether Greenspan remains mum or not remains to be heard.
The list of companies reporting earnings Tuesday is a long one, but here are several companies worth mentioning that are slated to report, either before or after the bell: Apple Computer (NASDAQ:AAPL), Bank One (NYSE:ONE), Biogen (NASDAQ:BGEN), Caterpillar (NYSE:CAT), General Motors (NYSE:GM), Intel, International Paper (NYSE:IP), Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Veritas (NASDAQ:VRTS) and Wells Fargo (NYSE:WFC). Again, within that list lies the possibility of a catalyst either in one direction of another for respective sectors.
Add to the mix that Friday marks July expiration which, in and of itself, should produce some rather wild gyrations. My best advice for those who can't watch the market actively this week is to be very selective when putting on trades. But for those with the ability to monitor price action closely, there are sure to be several big profit opportunities available this week. Just take a look at two of the Biotech short plays we had on the list over the weekend in Myriad Genetics (NASDAQ:MYGN) and Human Genome Sciences (NASDAQ:HGSI), whose shares lost 15 and 10 percent, respectively. Fear can be a wonderful thing if you're on the 'other' side.