A Wave of New Highs
The first full week of Q3 earnings season is underway and the markets celebrated with another round of new highs. The DJIA closed above the 9700 level for the first time since June 2002. Broader indices like the NASDAQ Composite set a 19-month high, the S&P 500 closed at a 16-month high and the Wilshire 5000 index also closed at its best levels since June 2002. Volume was very light today but it was expected with the Columbus Day holiday. Contributing to a lack of action were the quiet bond markets, closed for the U.S. holiday and the Japanese markets were closed for their own local holiday.
Overall the general feeling remains optimistic as investors position themselves ahead of what is expected to be a very good earnings season. One of Prudential's analysts mentioned that the three dozen plus S&P component companies who have already reported have on average been beating consensus estimates by 11 percent or better. That's exactly what investors want to hear. Current estimates are for Q3 earnings to be up 16 percent from last year. If businesses are beating the Q3 estimates by 10 percent or better then Wall Street can put more hope in the Q4 estimates for 20 percent profit improvement and that might actually keep the rally going.
The buying pressure was pretty broad today. Only one major sector index, the OSX oil services index, closed in the red. The strongest buying was concentrated in Transports, Disk Drives, Software, Banks, Brokers and Gold stocks despite a small drop in December gold futures. The U.S. markets enjoyed a positive tail wind from their European counterparts with the English FTSE up 1.2% and the German DAX up 1.9% today. American markets posted strong advance/decline numbers with 20 winners for every 7 losers on the NYSE and 21 winners per 9 losers on the NASDAQ. Up volume was more than three times down volume on the big board (NYSE) and better than twice down volume on the NASDAQ. New 52-week highs hit 633 to just 10 new lows between the two exchanges.
Chart of the DJIA:
Chart of the NASDAQ:
As would be expected during the onset of earnings season stocks were battered about by announcements and new analyst ratings. The three biggest stories today appeared to be Motorola (MOT), Honeywell (HON) and eBay (EBAY). MOT made headlines by announcing their Q3 results one day early. The company announced prior to the opening bell in response to a credit downgrade from Moody's, who cut MOT's rating from Baa2 to Baa3 over concerns from strong competition and revenue weakness. Surprisingly, MOT beat consensus estimates of 3 cents with 6 cents a share, excluding charges. Even more unexpected was MOT's positive guidance for the fourth quarter. Analysts had been expecting Q4 numbers to fall near 12 cents a share on revenues of 7.41 billion. Motorola now expects Q4 earnings in the 11 to 15 cent range on revenues closer to 7.8 billion. However, even the good news did little to assuage investors' fears with MOT's credit rating now just one level above junk. The stock added 8 cents to close at $13.87.
The best performer among the Dow Jones components was Honeywell (HON), which jumped 4.6% on a positive article in Barron's over the weekend. Barron's highlighted the company and said the stock offers a very attractive valuation given what they see is a bottom in the manufacturer's business and a recovery in the global economy. With a forward-looking P/E of less than 16 the company is significantly under valued compared to the S&P's average P/E near 29. HON should announce earnings on Thursday morning with consensus estimates looking for 40 cents a share.
Another headliner expected to announce on Thursday is EBAY. The online auctioneer was rattled for a 2.4 percent loss after a Smith Barney analyst downgraded the stock from a "hold" to a "sell". Problematic was the term analyst Lanny Baker used to describe EBAY's eBay Motors pricing model after surveying 150 car dealerships. The survey found that 30% are using the service but 40% used to but are no longer using EBAY's used-vehicle auctions. Whether a survey of 150 car dealers out of the 80,000 dealers in this country is enough research is an argument enthusiastic bulls will have to carry. We've mentioned in the past that EBAY is richly valued with a current P/E near 125 and any upset in its execution could wreak havoc on the stock price. Yet today's downgrade was not met with sharp selling but dip buying. The stock quickly rebounded from its early morning lows to bounce from old resistance, now new support in the $57.00-57.50 range. The intraday rebound probably isn't a surprise considering that EBAY's execution is not only on track but apparently one-year ahead of schedule. Look for EBAY to report after the bell on Thursday. Estimates are for 18 cents a share.
But enough about companies announcing on Thursday. The markets have plenty to watch tomorrow. Announcing earnings before the opening bell are several big cap stocks that could set the tone for the rest of the day. Many of them are bank stocks and economists will be listening to hear if loan demand has been picking up with the improving economy. The third-biggest U.S. bank by assets is Bank of America (BAC). Estimates for BAC are $1.70. Another big financial announcing tomorrow morning is Merrill Lynch (MER). We've already heard from the rest of Wall Street's big brokers and they've all beaten estimates, some by a wide margin. If MER doesn't turn in the same kind of results the XBD, currently at a fresh 52-week high, could easily see some strong profit taking. Estimates for MER are 85 cents a share. Dow component Johnson and Johnson (JNJ) also announces before the bell. Estimates for JNJ are 68 cents. Another big announcement could be Delta Airlines (DAL). Estimates for DAL are for a loss of $1.47/share. With all the positive press the airlines have been getting in recent weeks I wouldn't be surprised in the least to hear DAL beat that number.
After the bell we'll hear from Dow component Intel Corp (INTC). The semiconductor titan has already raised guidance twice this quarter so investor expectations are probably pretty high. If INTC doesn't beat the estimates of 23 cents the SOX is likely to take a dive on Wednesday and the index is already fighting with resistance at 475 creating a potential double-top.
Stay nimble and watch your stop losses. Earnings season can be dangerous with the potential for big gap opens in the morning that make stops hard to juggle.