Market Stats

The rally in stocks stalled on Wednesday following yesterday's less than inspiring release from the Federal Reserve. If the FOMC believes the U.S. economy needs help then growth must be slowing down even faster than expected. The banking sector was a big drag on the market with a -1.9% decline. Recent strength in the technology sector vanished following an earnings warning from PMC-Sierra Inc. (PMCS) and Adobe's (ADBE) disappointing earnings guidance last night. Shares of PMCS lost -6% while ADBE plunged -19% for the day.

The Fed's comments yesterday were not bullish for the dollar and the U.S. dollar fell to new five-month lows on Wednesday. Treasuries rallied again pushing the yield on the 10-year bond down to 2.54%. Precious metals soared as investors worried about the next round of quantitative easing and the effect on our currency. Gold hit a new all-time high for the fifth day in a row. The intraday high was $1,298 an ounce before settling with a +1.4% gain at $1,292.10. Gold is poised to mark its tenth annual gain in a row. Copper futures rose to new five-month highs and platinum rallied to four-month highs. Silver was a big winner too with a +2.4% gain to $21.05 an ounce. This was the first time silver has closed over $21 since March 2008. It was a different story for oil futures. Oil slipped 26 cents to $74.71 a barrel following a bearish increase in inventories. The Energy Department said crude supplies jumped 970K barrels to 358.3 million when economists were expecting a -1.75 million draw down.

Chart of the U.S.dollar ETF (UUP):

Chart of the Gold ETF (GLD):

It was a down day for stocks around the world. Most of the major indices closed in negative territory. The Hong Kong Hang Seng was an exception with a +0.2% gain but the Chinese Shanghai market was closed for holiday as was the Korean and Taiwan markets. The Hong Kong market will close for holiday tomorrow. In Japan the NIKKEI index recovered from its morning losses but failed to hold any midday gains and closed in negative territory with a -0.37% drop on light volume. Traders are still very much focused on the yen/dollar relationship after last week's currency intervention by Japan. There is a lot less worry about the yen strengthening since it is widely expected that Japan will step in again and sell more yen to weaken their currency (currently trading near 85 yen to the dollar).

European markets were struggling with bearish economic data. The 16-nation euro zone industrials orders showed a -2.4% drop in July following a +2.4% rise in June. Economists were only expecting a -1.4% decline. Naturally worries are growing that manufacturers will slow down production and hiring if demand continues to wane. The EU zone also saw its consumer confidence stumble. Analysts were expecting an improvement from -11.4 in August to -10 but today's report only showed an improvement to -11.2. Slowing growth and drastic budget cuts by several regional governments is taking its toll on the population's attitudes (do you recall all of the recent strikes?). Currently economists are projecting the EU to see +0.5% GDP growth in the third quarter, down from +1.0% growth in the second quarter.

News on the residential real estate market here in the U.S. continues to sour. The Federal Housing Finance Agency (FHFA) issued their report on home prices with mortgages backed by Freddie Mac and Fannie Mae. According to their report housing prices slipped -0.5% in July and they revised June's decline from -0.3% to -1.2%. Economists were only expecting a -0.2% drop for July, which was the eighth monthly decline in a row and marks a -3.3% plunge from a year ago. Based on these numbers home values have fallen to September 2004 levels. The market is suffocating under a tidal wave of foreclosures. A few days ago RealtyTrac reported August was the worst month on record with over 95,000 homes repossessed. The National Association of Realtors is due to release their August sales figures on existing home sales tomorrow. The July report was terrible with a -27% drop in home sales so the bar is set pretty low for August.

Speaking of home sales the pace of mortgage applications is not painting a very healthy picture. Mortgage rates are still near record lows at 4.44% for a 30-year fixed rate mortgage. Yet applications are down. The Mortgage Bankers Association said their index of applications fell -1.4% last week. This is the third weekly decline in a row. Applications for new purchases dropped -3.3% and refinancing fell -0.9%. A Reuters article calculated that at current rates your monthly payment is only $503 per $100,000 financed. FYI: NAR estimates the median price of a home in this country at $183,000.

Corporate news was generally discouraging today. Adobe (ADBE) made the biggest splash following its earnings report last night. The company beat estimates by 5 cents a share but the market was unhappy with its guidance. The stock garnered several downgrades and gapped open lower to eventually settle with a -19% decline near its 2010 lows. Tech giant Microsoft (MSFT) had much better news but traders were already in a mood to sell. MSFT announced they were raising their quarterly cash dividend by 23% from 13 cents to 16 cents. It is their first dividend increase in two years but investors were expecting more. The stock gapped open lower and closed with a -2.1% loss on the session.

Normally a dividend raise is a sign of confidence by management that the environment is improving so it's safe to return money to shareholders. Today's increase in dividend bumps MSFT's yield to 2.5% a year, giving it the 12th highest yield in the NASDAQ 100. The company is poised to pay out $5.5 billion a year in dividends thanks to its 8.65 billion shares outstanding. MSFT is also taking advantage of the market's demand for high-quality corporate paper. Yesterday the board approved up to $6 billion in new debt and today MSFT sold $4.75 billion in debt, some of it at the lowest level in U.S. history. The company has over $37 billion in cash but a lot of this is overseas and it is cheaper for MSFT to raise money here by selling bonds at extremely low rates than repatriating their cash and paying taxes on it.

In less happy news the Wall Street Journal reported that Blockbuster Inc. is on the verge of filing for Chapter 11 bankruptcy protection. The company has been withering under competition from Netflix (NFLX), Amazon.com's download service, and Red Box. Blockbuster is struggling with $900 million in debt and hundreds of big brick and mortar stores. Smaller rival Movie Gallery Inc. filed for bankruptcy over six months ago and instead of reorganizing they decided to liquidate the company. There is plenty of speculation if Blockbuster will be able to emerge from bankruptcy or not. This could be the final credits for Blockbuster.

Online auction giant Ebay (EBAY) is another example of traders being in a mood to sell. EBAY guided its third quarter earnings toward the top of its previous range (35-37 cents a share) and yet investors sold the news anyway. The stock fell -5.5% midday but pared its losses to just -1.6% before the closing bell. EBAY is still up over 26% from its July 2010 lows.

There were exceptions. General Mills Inc. (GIS) reported earnings this morning of 64 cents a share. That was one cent better than expected. Revenues missed estimates at $3.53 billion versus $3.57 billion. GIS claimed that globally the sales environment is still tough but their core food business remains strong. Management reaffirmed their 2011 guidance and the stock shot higher to post a +2.69% gain.

In after hours action the earnings data continues to trickle in. Bed Bath and Beyond (BBBY) and Red Hat (RHT) released their results. BBBY delivered a profit of 70 cents a share, which was 7 cents better than expected. Q2 revenues rose +11.6% to $2.14 billion, beating estimates of $2.1 billion. Same store sales jumped +7.4% compared to a decline of -0.6% a year ago. BBBY management raised their 2011 guidance and the stock was up over +4% after hours. Meanwhile software firm Red Hat (RHT) reported earnings of 19 cents a share, which was one cent ahead of expectations. Revenues climbed almost +20% to $219.8 million, which was better than the estimate. The company issued upside earnings and revenue guidance going forward. After a -4.3% decline during the regular session shares were trading higher this evening.

It's not rocket science to see that the market's short-term trend is up. However, stocks are very overbought. The S&P 500 is up about +9% from its late August lows. The S&P 500's rally just failed at prior resistance near 1150. This is not a spot to be loading up on bullish positions. Broken resistance near 1130 should offer some short-term support but I would prefer to look for a dip near the 200-dma or better yet a dip near the 1100 area before considering new bullish positions. This appears to be a "buy the dip" market right now but we need to look for a decline toward support. The best place to look for support is prior resistance.

Chart of the S&P 500 index:

Even with the decline yesterday and today the NASDAQ composite is still up about +11% from its August lows. The move has been virtually non-stop. The breakout to new relative highs is very positive but we just don't want to chase it here. Previous resistance near 2300 could be new support for the NASDAQ but I would prefer to look for a dip near 2260. Consider the volatile move higher readers may want to wait for a pull back to 2250 instead before looking for new bullish positions.

Chart of the NASDAQ index:

As expected the small cap Russell 2000 index rallied to resistance near 670 and stalled. The move looks like a clearly defined failed rally and I would expected a deeper correction. The 640 and 630 levels are a good spot to watch for potential support on the $RUT index.

Chart of the Russell 2000 index:

Tomorrow morning investors will be reacting to the weekly initial jobless claims. Economists are expecting 450,000 new claims, which would match last week's number. We'll also see the leading indicators from August. The bigger report will be the NAR's existing home sales data for August. Analysts are estimating a small improvement to an annual pace of 4.1 million homes. Friday's market moving event is probably the durable goods orders number. Also out Friday is the new home sales figures for August.

In summary, the trend is up but stocks are overbought and way overdue for a correction. We want to buy a dip but look for a decline near support

-James