Markets Pause Ahead of CSCO's Numbers
The major averages were close to unchanged by day's end but the closing numbers hardly tell the whole story. Investors took profits early in the session and chose to ignore positive economic news from the ISM services index and the U.S. factory orders. Yet the selling pressure could not gain any momentum and shorts began to cover quickly in the last half hour ahead of Cisco Systems' (CSCO) earnings report. The heaviest selling hit insurance, retail, and broker-dealer stocks. The biggest gainers were seen in homebuilders and semiconductors. Gold futures added another $2.70 to close at $382.70 and crude oil jumped $1.55 to end at $30.30 a barrel.
Overall stocks were mainly flat to down. Asian and European exchanges closed negative but like their U.S. counterparts the selling was mild. Market internals for U.S. stocks were equally flat. Advancing issues were neck and neck with decliners 13 to 13 on the NYSE and 15 to 15 on the NASDAQ. Up volume just slightly out paced down volume on both exchanges.
Chart of the DJIA:
Chart of the NASDAQ:
U.S. Factory Orders for September were released today. Economists had been looking for a 0.6 percent gain compared to a 0.8 percent decline in August. The headline number came out at a 0.5 percent gain but the August number was revised upward from a 0.8 decline to 0.3 percent decline, which is definite improvement. Defense orders were sharply lower but demand for non-defense goods jumped 4.1 percent in September, which is the best monthly improvement in nearly a year. Today's data is yet another link in the chain of economic reports that shed light on an improving manufacturing sector for the U.S. economy.
The ISM Services index or non-factory businesses index rose to 64.7 percent, the second-highest level on record. This was the fourth gain in five months and above estimates for a minor jump to 63.4 percent. The ISM Services index, like its bigger brother the ISM factory report, indicates improvement or expansion with any reading above 50. Probably the most crucial part of today's report was the employment component. Today's ISM data showed employment at its highest since November 2000. It was only yesterday that investors began to doubt there would be any job improvement in this Friday's report from the Labor Department because the Challenger Gray and Christmas layoff numbers had jumped 125 percent. Current forecasts show economists expecting the Friday non-farm payroll report to improve by 65,000 jobs. However, today's ISM services data has encouraged UBS Securities to raise their estimates to a gain of 125,000 jobs. This matches Deutsche Bank Securities estimates for a 125,000 improvement in the October jobs report. Suddenly investors can renew their positive expectations and Friday's numbers become even more important. Another jump in job creation and it could refill this market's gas tank for another rally higher. Any negative surprise and bids could evaporate as the exits get crowded real fast.
The economic data above should have carried more weight with investors but Wall Street was more focused on the soon to be announced earnings from Cisco Systems. As a matter of fact many traders believe the last half hour rally was short covering ahead of the CSCO numbers. Considering their earning results, short covering would have been a wise move. The company doubled its net income from a year ago with 17 cents a share, which was 2 cents above estimates. Revenues jumped 5.3% to $5.1 billion. This was a record sales quarter for CSCO as the company experienced its strongest demand in two years. Analysts had been looking for revenues near $4.86 billion. CEO John Chambers was cautiously optimistic as demand from telecom companies had risen 10 percent over the last quarter. The stock jumped 6.6 percent in after hours trading and could very well ignite a new rally in the NASDAQ tomorrow.
Speaking of tomorrow economists will be looking for another decline in the weekly initial jobless claims to the 380,000 level. Last week initial claims rang in at 386K. The combination of CSCO's earnings surprise and the inability to mount any sort of selling momentum today could easily send the markets to new highs tomorrow. We continue to urge caution on bullish play selection but the 10,000 and 2,000 levels could be price magnets that are too strong for the indices to resist. Also on deck for tomorrow are the October same-store sales numbers. Trade carefully and watch those stop losses!