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Market Wrap

Citigroup and UBS Warnings Send Stocks Surging

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The major indexes surged higher on Monday despite warnings out of Citigroup (NYSE:C) $47.72 +2.24% and Switzerland-based UBS AG (NYSE:UBS) $54.94 +3.17% that significant loan-related losses in the third-quarter would impact results.

After a modestly higher open for the major indexes and the thought that both money center banks may be overstating write-downs in order to begin 2008 with a clean slate, buyers built bullish momentum towards the close with advancers easily outnumbering decliners throughout the session.

While near-term bullish leadership at the big board took a rest last week with the NYSE's 5-day NH/NL ratio reversing into a column of "O," at 01:00 PM EDT the 213 new highs began to surpass a recent NH benchmark of 210 found at the conclusion of the September 19th session, when the NYSE new high tally reached 210.

The last time we witnessed 260 new highs at the big board was July 19th when 259 stocks managed to trade a new 52-week higher compared to a then-mounting 110 new lows.

The number of new highs at the NASDAQ ended just shy of the 201 found on September 19th.

It would currently take respective 64% and 66% for the NYSE and NASDAQ 5-day NH/NL ratios to reverse back up into a column of "X."

Shares of Dow Industrials (INDU) 14,087.55 +1.38% component and S&P 100 Index (OEX.X) 723.78 +1.30% heavyweight Citigroup (C) opened lower at $45.89 then darted to a morning low of $46.68 after the banking giant said it estimated third-quarter profits will decline about 60% to roughly $2.2 billion. The largest U.S. bank said it would likely write down about $1.4 billion of its $57 billion portfolio of highly leveraged loans, lose about $1.3 billion on the value of securities backed by subprime loans, and lose $600 million in fixed-income credit trading. Citigroup also said consumer credit costs rose $2.6 billion, mostly due to a boost in loan-loss reserves.

"Looking ahead to the fourth quarter, while we obviously cannot predict market movement or other unforeseeable events that may affect our business, we expect to return to a more normal earnings environment as the year progresses," CEO Chuck Prince said in a recorded call.

As traders and investors digested the quarterly update out of Citigroup, one of the firm's analysts raised his rating on several home-builders (CTX $27.92 +5.08%, DHI $13.46 +5.07%, LEN $23.27 +2.73%, PHM $14.79 +8.67% and RYL $22.56 +5.27%) to "buy" from "hold" on signs the worst may behind the industry.

Citigroup (NYSE:C) - $1 Box Scale

From an institutional perspective, shares of Citigroup (C) $47.72 +2.24% were little changed on Monday. The point and figure chart remains bearish and below trend, with a bearish vertical count of $36 still intact. A trade at $44 would be further bearish and break important near-term support at the $45.00 level. A trade at $50 would be viewed as bullish and have demand (X) starting to outstrip supply (O), and also have the stock breaking above it bearish resistance trend.

I would strongly suggest market participants have alerts set at $50 and $44 as trades at either of these levels will likely have GREAT impact on INDU/SPX/SPY/OEX direction!

UBS AG (UBS) $54.94 +3.17% actually gapped higher to open at $54.43 after the banker said it would write down $3.4 billion in the third quarter because of problems in U.S. subprime mortgages. For the first time in nine years, UBS said it will likely post a pretax loss, which the bank estimated at $690 million.

UBS AG (NYSE:UBS) - $1 Box Scale

After achieving, then exceeding a bearish vertical count of $52 in late August, shares of UBS generated a reversing higher double top buy signal at $55 on September 19th.

According to Dorsey/Wright & Associates, their banking sector bullish % (BPBANK) is currently "bull alert" status at 40% having reversed up from "bear confirmed" at a very oversold measure of 22% in early August (number 8 on a PnF chart).

Several sessions ago I received an email question from a reader wondering about the market/economy with all the "bad news" regarding the credit crunch and subprime issues.

Today's news out of Citigroup and UBS provides a GREAT test for a VOTE from market participants going forward. Is it "good news," or "bad news?"

UBS is certainly suggesting that DEMAND (X) is getting the upper hand on SUPPLY (O) and that would remain "true" as long as the stock does NOT trade $50.00.

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Conversely, C has yet to hint that DEMAND (X) is outstripping supply (O) and that would remain "true" as long as the stock does NOT trade $50.00..

I now have an UPSIDE alert set on C at $50.00 and a DOWNSIDE alert set on UBS at $50.00.

That's $50/$50 and with today's news and guidance going forward, market participants (bulls and bears) can make the decision..

My feel, based on observation is that the MARKET may have determined that things aren't as bad as some have thought as all of our major market bullish percent remain in a column of X.

Again, this could be further tested going forward with C and UBS.

U.S. Market Watch - 10/01/2007 Close

Major equity indexes here in the U.S. had the INDU/DIA, OEX, COMPX, NDX/QQQQ closing at either all-time, or new 52-week highs.

Sector action did show the MSH.X, XCI.X, SWH, IIX.X, IXTCX and HUI.X also closing at new 52-week highs.

The StreetTracks Gold Trust (NYSE:GLD) $73.90 ($739.90) also closed at a new 52-week high.

I should note that the U.S. Dollar Index (CEC:DXY) 77.94 would show a fractional advance of 0.20, or +0.26% from Friday's close of 77.74.

With the BIG and NARROW indexes (INDU, OEX and NDX) closing at new 52-week highs, bulls look for bullishness to broaden out in the S&P 500 (SPX.X) 1,547.07 +1.32%.

S&P 500 Index (SPX.X) - Daily Intervals

The S&P 500 Index (SPX.X) showed impressive strength again today and shorts look like they've "conceded" a test of the July highs.

S&P 500 Index (SPX.X) - Daily Intervals

With the BIG and NARROW INDU, OEX and NDX at new highs, I'm also going to show the SPX with its institutionally traded MONTHLY Pivot retracement. The MONTHLY S2 (support 2), S1 (support 1), Pivot (mid-point of September), R1 (resistance 1) and R2 (resistance 2) are mathematically derived levels that institutional computers will often times be set to trade.

These levels can be helpful when a security, or basket of stocks break to new highs, or new lows.

Buyers certainly look to be in control above 1,525.

On September 19, the institutionally monitored S&P 500 Bullish % (BPSPX) from Dorsey/Wright & Associates achieved "bull confirmed" status with 60.77%, or 304 of the 500 components showing buy signals when the SPX itself traded September's MONTHLY R1.

Today, we see that level find further buying, despite the "news" out of Citigroup (C).

At tonight's close, Dorsey/Wright's S&P 500 Bullish % (BPSPX) saw an additional gain to 63.38% from Friday's 62.37%.
 

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