Stocks got a boost on Monday as market participants continue to remain optimistic about the latest round of earnings reports, sending the S&P 500 higher by 0.4% to a one-year high of 1076.19. The Dow Jones Industrial Average added 20.86 points to close at 9885.8 while the Nasdaq was the laggard of the major U.S. indexes, shedding less than a point to close 2139.14. Trading was light due to the Columbus Day holiday with just 6.6 billion shares changing hands across all U.S. exchanges, the lowest total since the first trading day of 2009.
Market Stats Table
As I always say, an up day, at least for two of the three major indexes, is better than a down day, but in no way was Monday's trade a sequel to Columbus Day 2008, which delivered a 1000 point gain for the Dow. Familiar themes continued to play out, helping bolster stocks, namely a plummeting U.S. dollar and rising crude oil and gold prices. Simply put, the U.S. dollar is weak and there appears to be little dollar bulls can do to right the ship as Uncle Sam continues to issue debt at a prodigious pace and investors renew their favor for stocks that derive a bulk of their sales from international markets.
With earnings season set to kick into high gear this week, it is reasonable to expect that more than a few bellwether names will report higher profits due to favorable currency exchanges. So there is some benefit to a weak dollar, at least in small doses, prolonged dollar weakness, which the market appears to be factoring, is not the best news in the world. The chart of the U.S. Dollar Index below shows just how ugly things have been for the greenback over the past few months.
The S&P 500 and the dollar are as uncorrelated as they have been at any point in the last 40 years, according to Bloomberg data. While the S&P 500 is up 59% from its March 9 lows, the Dollar Index is down 14% in the same period.
Of a course a weak dollar usually buoys the fortunes of oil bulls and that was the case on Monday as crude rose for a third day, gaining 2.1% to $73.27. Yeah, oil is certainly approaching ''been there, done that'' territory with this latest move toward $75 a barrel, where it has faltered several times in previous months. The latest commitment of traders report shows that oil traders are leaning bullish with 50,000 more long positions than short in the latest report, but that is also significantly less bullish than when oil made a similar move to $75.
Crude has not trade above $75 a barrel since August and that figure has firmly established itself as the next resistance point for black gold. Demand statistics and inventory data do not help crude's cause, so oil bulls will likely continue to rely on a faltering dollar to lift crude higher.
Oil stocks benefited from the rally in the underlying commodity as oil and gas producers led the gains among the 10 industry groups tracked within the S&P 500. ExxonMobil (XOM) gained 1.2% to $70.13, good for a sixth consecutive up day for America's largest energy producer. Chevron, the second-largest U.S. oil explorer, added 91 cents to close at $73.67 as gains in both ExxonMobil and Chevron helped lift the Dow higher.
Oil services names also got a jolt today, not surprising given that they are actually more intimately correlated to the price of crude than the likes of Chevron and ExxonMobil. Halliburton (HAL) and Schlumberger (SLB) were both up more than 2% today while Diamond Offshore (DO) and National Oilwell Varco (NOV) barely missed joining the 2% gainer club. That means it was a bullish day for the Oil Services HOLDRs ETF (OIH), which I mention frequently. OIH touched a new 52-week high of $125.36 before dropping back a bit to close at $123.91.
With crude hovering near a critical resistance area, a strong move beyond $75 a barrel could lift OIH a few points and a move beyond $80 a barrel could take OIH toward the $135 area. The chart is below.
But allow me to be honest. The market is in throws of a new earnings season and those numbers are going to be the catalyst that moves stocks over the next several weeks and that means all eyes are going to be turned toward the quality of the reports and any guidance that is delivered. Some strategists are advocating a cautious approach because stocks have already priced in better-than-expected earnings and with so many stocks resting at or near their 52-week highs, a little caution is probably warranted.
S&P 500 members are expected to report a ninth consecutive quarter of declining earnings, the longest streak since the Great Depression, according to Bloomberg. Earnings will decline in the third quarter by roughly 22% from the third quarter of 2008 before growth resumes in the fourth quarter.
S&P 500 Earnings
One stock that got earnings season off to a good start was Black & Decker (BDK), which soared $3.58, or 7.6%, to $50.82 on Monday. The maker of Delta and Dewalt tools raised its third-quarter outlook due to some help from, what else, cost-cutting. In all fairness to Black & Decker, the company did say its third-quarter results would be helped by lower tool prices and a lower tax rate.
The company said it expects to earn 91 cents a share, well above previous guidance of 35 cents to 45 cents. Sure, 1,200 job cuts probably made that lofty new number attainable and the new tax rate is chipping in 14 cents a share, but beating previous guidance and analyst estimates by more than double, regardless of the circumstances, is a move that the Street will applaud and did so with Black & Decker today. A Sterne Agee analyst raised his price target on Black & Decker to $56 from $41.
While Black & Decker does not have ''bellwether'' status, the news from the company might serve to increase investor optimism that this earnings season will be chocked full of positive surprises. More clarity on that theory should be delivered as early as tomorrow when Dow component and drug giant Johnson & Johnson (JNJ) reports third-quarter results.
Analysts are expecting J&J to earn $1.13 a share, though it is probably a fair to expect that number to come in around $1.14 or $1.15 a share given what the company has done its previous four earnings reports. The stock is relatively cheap at less than 14 times trailing earnings and is within earshot of its 52-week high. J&J has cleared some resistance below $62 and has some room to run to $67 and perhaps beyond.
And if you are looking for bellwethers, the after market action on Tuesday will be worth watching with two significant reports. I will start with the ''minor'' one of the pair before getting into the more popular one.
Truthfully, it is not fair to underestimate the earnings from a major railroad operator like CSX (CSX), which reports after the close tomorrow. Transportation stocks like CSX are usually good barometers for the overall health of the economy and that means the CSX report is worth watching. If you find yourself in the Dow Theory camp, you probably believe that the Dow Jones Transportation Average portends moves in the Industrials and as CSX is a member of the Transportation index, it does have some bellwether-like status.
CSX is expected to post earnings of 71 cents a share and the stock has nearly doubled the returns offered by the S&P 500 over the past three months, but still has some room to run to its 52-week high of $53.84.
While the CSX report will be worth watching, it is very well could be overshadowed by Intel's third-quarter report, which is also released after the close Tuesday. Intel's report is sure to drive Wednesday's trade, but before I jump that far ahead, it is worth remembering that a bullish second-quarter report from Intel was one of the primary catalysts that drove stocks higher during the previous earnings season.
Intel is a Dow component, one of the largest members of the Nasdaq 100 and the largest chipmaker in the world, so to say Intel's earnings report is ''important'' is somewhat of an understatement. The stock touched a 52-week high of $20.65 on Monday before peeling back a bit and that may indicate some investors were gobbling up shares ahead of the earnings report.
Intel is a bellwether and good earnings there might portend good earnings for a majority of blue chip firms. If nothing else, a bullish report from Intel should bolster the fortunes of the technology sector and perhaps rejuvenate Nasdaq bulls. Analysts are expecting Intel to post a profit of 27 cents a share and an upside surprise means we should see a higher open for stocks on Wednesday morning.
Supported by its 50-day moving average, a strong earnings report could bring Intel to not only a fresh 52-week high, but close to resistance in the $22.50 area as well.
Looking at the charts, it was disappointing to see the Dow tease 9900 and not close there, but that may have been more the product of anemic volume than anything. With two Dow components, J&J and Intel, reporting earnings tomorrow, the index will have ample ammunition with which to traverse 9900 and establish another run toward 10000.
A worst case scenario would be that J&J disappoints and Intel follows that up with its own dour news and that could lead to open in the 9750-9775 area on Wednesday. From there, 9600 could become an issue, but positive earnings announcements might 9600 unthinkable in the near-term.
With Monday's close at 1076.19, the S&P 500 is residing comfortably near the September peak of 1080.15, indicating investors may truly be expecting some cheery earnings report. Once 1080 is cleared, 1100 becomes the number everyone will focus on, if they are not doing so already. After 1100, the index should bump into resistance around 1120-1125. If earnings disappoint and 1050 is violated on the downside, a tumble to 1025 could be in the offing and from there the picture gets a lot less attractive with 975 becoming a possibility.
S&P 500 Chart
It would not be surprising to see some lethargic trade on the Nasdaq tomorrow as tech investors wait for the Intel numbers to be released. Another scenario to consider is that investors just will not be able to contain themselves and will buy up Intel shares during Tuesday's session and that could drive the Nasdaq higher.
Clearing the September peak of 2167.70 would be a good starting point and that needs to happen before resistance around 2180 can be dealt with. Earnings season should be the deciding factor in the Nasdaq's chances to conquer 2200 or fall back to 2050 or worse.
Earnings season is here and, believe it or not, that actually makes things pretty simple. Can companies across a healthy spectrum of sectors quench investors' thirst for top line AND profit growth? Or will the third quarter provide a sequel to the second quarter where companies could only beat meager estimates on the back of cost-cutting? The answers to those questions will play a heavy hand not only in the near-term, but for the rest of 2009 as well. I am filling in for Jim tomorrow, so I look forward to seeing again in 24 yours.