Market Stats

It looked like Tuesday's market rally might continue this morning until a disappointing ADP report on jobs suddenly soured the mood. The monthly report from private payroll company ADP Employer Services showed an unexpected decline of -39,000 jobs. That sparked some profit taking but overall the S&P 500 traded in a narrow seven-point range. The NASDAQ was not so lucky and some of the high-flying technology stocks were hit with solid losses. A few stocks giving up gains were: Amazon.com (AMZN -3.4%), F5 Networks (FFIV -12.5%), Priceline.com (PCLN -3.5%), Citrix Systems Inc. (CTXS -14%), Netflix (NFLX -3.7%), Baidu Inc. (BIDU) -4.1%), etc.

There was another rush into the perceived safety of bonds and the bond market rallied to another relative high. Yields move opposite of price and the yield on the 10-year U.S. treasury fell to 2.399%, its lowest level since January 2009. Meanwhile the 2-year, 3-year, 5-year, and 7-year U.S. bond yields all set new all-time record lows. The 2-year yield slipped to 0.38%. At the same time the U.S. dollar continued its plummet lower and settled with a new eight-month low thanks to the euro. The dollar settled at $1.3935 against the euro for a -0.7% decline. The dollar also set another 15-year low against the Japanese yen with a -0.4% drop to 82.92 yen.

Chart of the FXE euro ETF:

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

This dollar weakness and expectations for massive government quantitative easing is lifting commodities. It's a familiar story. The dollar sinks to another new relative low and metals hit new highs. Gold futures surged to $1,351 an ounce intraday. Gold settled with a +$7.40 gain at $1,347 following yesterday's +$25 rally. These are new all-time highs for gold and many are forecasting a rise toward $1,400 an ounce. So far gold futures are up +22% for the year. Silver is also seeing strength with another +1.9% gain and a 30-year high at $23.17 an ounce. Copper rallied +0.7% to close at $3.753 a pound. This is a new 27-month high for copper prices. Crude oil continues to rally on dollar weakness even though the oil inventory report this morning was bearish. The Energy Department released their weekly inventory numbers and our oil inventories rose +3.09 million barrels to 360.9 million. Economists were only expecting a +413,000 barrel increase. Inventories remain +13% higher than our five-year average. A week ago this report showed strong fuel consumption. Today's report said fuel consumption plunged -6.4% to 18.5 million barrels. That's the biggest weekly drop in consumption in over five years. Crude oil prices rose +0.5% to $83.23 a barrel.

Chart of the GLD gold ETF:

Chart of the SLV silver ETF:

Overseas the Asian markets reacted favorably to Wall Street's rally on Tuesday. The Hong Kong Hang Seng index gained +1% to settle at a new 2010 high on strong volume. The Chinese Shanghai index rallied +1.7%. Yesterday the Japanese market surged on the Bank of Japan's new quantitative easing program that included the possibility of government purchases of ETFs. The short covering in Japan continued today and the NIKKEI index rose +1.8% to close at a two-month high. However, gains were somewhat limited by strength in the yen as the dollar sank to a new 15-year low against Japan's currency (making Japanese exports more expensive here in the states).

European markets also showed widespread strength. News that Fitch had downgraded Ireland's debt from AA- to A+ was not enough to stymie the rally. The English FTSE index rose +0.8% while the German DAX and French CAC-40 both rose +0.88%. Analysts seem to be growing more positive that central banks will do whatever is necessary to prevent a double-dip recession. Yet the IMF has a more somber outlook for the U.S.

Based in Washington D.C. the IMF includes 187 member nations and the organization updated their worldwide growth forecasts ahead of their October meeting. The IMF now expects global growth of +4.8% in 2010 and +4.2% in 2011. That is a +0.2% improvement in their 2010 forecast from July. Unfortunately the outlook for the more developed Western nations is dimming. The IMF lowered their forecast on U.S. growth from +3.3% to +2.6% for 2010. Their 2011 estimate is +2.3% growth in the U.S. The 16-nation euro zone is expected to see +1.7% growth in 2010 and +1.5% growth in 2011. Meanwhile China is expected to grow +10.5% this year and +9.6% the next. The IMF expects Brazil to see +7.5% growth in 2010 but a drop to +4.1% in 2011.

The IMF also offered some gloomy forecasts for the real estate market. The institution warned that it could take up to eight years before the real estate market recovered and the market faces a strong risk of seeing a double-dip in prices. On a happier note the Mortgage Bankers Association said they saw a +9.3% increase in mortgage applications to buy a home. Applications for refinancing fell -2.5%. The interest rate on a 30-year fixed mortgage fell to another new all-time low of 4.25%.

Earnings results are starting to trickle in but the big report today was the ADP employment data, a precursor to the government's non-farm payroll data due out on Friday. Economists were expecting the ADP report to show +18,000 new jobs. Sadly, ADP said private businesses cut 39,000 jobs. This was the first decline since January 2010. Automatic Data Processing's report is based on data collected from 340,000 private businesses and should offer some insight into the government's private job creation number. In a separate report the firm Challenger, Gray and Christmas said larger employers planned on 37,151 layoffs in September. That's a +7% jump from the 10-year low set in August. After seeing the ADP numbers it creates a worry that without job improvement the consumer will cocoon themselves at home and pull back on spending, which accounts for nearly 70% of the U.S. economy.

We did see some M&A headlines this morning. JNJ and GE are making acquisitions. Johnson & Johnson (JNJ) announced they would by Dutch biotech firm Crucell NV for $2.41 billion. JNJ already owned a 17.9% stake in the company. Today's acquisition strengthens JNJ's footprint in the vaccine market. General Electric (GE) actually rallied on news it was buying oilfield-equipment manufacturer Dresser Inc. for $3 billion. Dresser Inc. has annual revenues in the neighborhood of $2 billion. In the last five years GE has doubled its energy-related business and the company says that today's deal will add to earnings next year. GE is also making deals in the financial arena with the company announcing it purchased $1.6 billion worth of retail credit card debt from Citigroup Inc. (C).

The Q3 earnings season is about to start and we're starting to see some early announcers and so far most of the headlines have been bad. Last night after the closing bell Equinix (EQIX), a data center operator, issued a warning that its Q3 revenues would fall in the $328-330 million range. Analysts were expecting $336.7 million for the quarter. The news garnered several downgrades and the stock gapped open and closed with a -33% loss. Another disappointment was agriculture name Monsanto (MON) with a three-cent earnings miss. Before the bell this morning MON reported earnings with a 9-cent loss on revenues of $1.95 billion. Wall Street was expecting a loss of 6 cents on revenues of $1.82 billion. MON's management issued downside guidance for 2011 and yet the stock actually managed to post a gain on the session (+0.2%). Of course shares of MON were down sharply in late September so the bad news may have already been baked in.

Wholesaler Costco (COST) also reported earnings this morning. Management delivered a profit of 97 cents a share on revenues of $24.13 billion. The profit was 2 cents better than expected but revenues missed Wall Street's estimates of $24.22 billion. Same-store sales were up +6%. Shares of COST gapped open lower near $63 but managed to rebound back into positive territory and close at a new two-year high over $65.00.

After the closing bell tonight Immucor Inc. (BLUD) reported earnings of 30 cents a share on revenues of $83.6 million. The profit was in-line with estimates and revenues were close to consensus estimates of $85 million. Unfortunately for shareholders the company has warned that 2011 earnings would fall in the $1.08-1.18 range compared to Wall Street's estimates of $1.28. During the regular session BLUD had rallied +0.6% to a new three-month high of $20.44 but after hours BLUD is down -17.5% near $16.85 a share.

Thursday morning Dow-component and the country's largest aluminum producer Alcoa (AA) will officially kick off the Q3 earnings season. The company has a tendency to miss the estimate and currently Wall Street expects a profit of 6-cents a share. Maybe this time, with the rise in commodities, AA can avoid an earnings miss. Thursday morning will also bring out the September same-store sales figures for dozens of major retailers across the country. We'll also get last week's initial jobless claims. Economists are expecting initial claims to come in at 455,000.

The big event this week is Friday's jobs report. Currently economists are estimating September job growth or job losses in the -8,000 to -0 (zero) compared to the -54,000 in August. After looking at the ADP numbers today you might think that we're setting up for a big miss in the jobs number. Yet the September jobs data failed to see any serious market sell-off. This time any big decline (which will hopefully see the final layoffs of the summer census workers), could be the silver lining that might guarantee more stimulus (and/or quantitative easing) by the Federal Reserve. Analysts are also expecting the unemployment rate to tick higher from 9.6% to 9.7%.

Let's take a look at the major indices. It would be easy to say the markets are overbought with the rally from its late August lows. However after almost two weeks of churning sideways there is a chance yesterday's short covering inspired rally could continue. I would much rather see a correction over the next couple of weeks because it would set up for a nice entry point into a fourth-quarter rally following the midterm elections. Unfortunately what we want and what we get are often to very different things. Mutual funds are facing their fiscal year end on October 31st and with the stock market at multi-month highs these funds may feel compelled to chase stocks higher. That's not a strategy I would recommend but it is something we could see. I'm still hoping we'll see a correction as traders react to Q3 earnings news.

The S&P 500's breakout over 1150 is bullish and now broken resistance should be short-term support. If 1150 fails then the S&P 500 should find additional support at 1130 and 1120. Overhead I'm looking for resistance near the mid May highs around 1173.

Chart of the S&P 500 index:

Some of the NASDAQ leaders were hammered today but the composite index only suffered a -0.79% decline. Currently resistance near the 2400 level is holding. A breakout here could spark a quick rally toward the 2450 area. If we see a correction then look for support near 2300 and its simple 200-dma.

Chart of the NASDAQ index:

The small cap Russell 2000 index continues to climb and hit new four-month highs on Tuesday. The small caps have slowly been chewing through resistance level after resistance level. This index is still overbought but if the mood stays bullish I would expect corrections to be shallow. Broken resistance near 670 could be support. I would look for some resistance near the 700 mark and the mid-May highs near 720.

Chart of the Russell 2000 index:

I always like to keep an eye on the SOX semiconductor index. Thus far I'm not seeing a lot of change. The SOX Is consolidating sideways under its 200-dma and still has a bearish trend of lower highs but a close over 355 might inspire the bulls. We also want to watch the transports and the Dow Jones Transportation index has broken out over resistance in the 4500-4550 zone. This index also looks overbought but traders have been buying the dips in the transport sector for the past couple of weeks. Continued strength in the transports is bullish for the wider market. The banks continue to be under performers but that could change. The BKX banking index looks ready to breakout past resistance near the 48 level. The BIX banking index is still lagging and both still have a bearish trend of lower highs. Readers may want to focus on the XLF financial ETF instead and wait for a close over the $15.10 mark to signal a new higher high and a breakout over resistance.

Chart of the XLF financials ETF:

I don't want to sound like a broken record here but not much has changed. The trend is still up and we're still looking to buy a dip. I am repeating myself but the best case scenario would be an earnings-inspired correction in the next two weeks that ends in the second half of October. We see the market bounce from significant support offering a lower-risk entry point to buy the dip and set our stop losses. Then ride the rebound higher through the elections and into November. That may not happen. As I said earlier with stocks pushing higher there could be pressure on fund managers to chase the market ahead of their fiscal yearend.

We also have to keep in mind that the economic data has been mixed and the jobs picture is not improving. While talk of a double-dip recession has faded there are still risks for this economy and plenty of investors and analysts are concerned. The infamous Dr. Doom, Mr. Roubini, is still grabbing headlines and claims we have a 40% chance of a double-dip recession. Naturally I assume he has a bearish bias to keep up his reputation but I thought he did have an interesting outlook. Mr. Roubini claims we don't have to have another meltdown, Lehman Brothers type of disaster to spark the next wave down. Instead we (the economy and the market) could die the death of a 1,000 cuts as the labor market fails to improve and real estate continues to fade and conditions in Europe (think Greece, Ireland, Spain) start to stall again.

Overall I remain optimistic for the next couple of months but we need to wait for an entry point and wait to see what corporate America has to say about the Q3 earnings season and their guidance as they look forward. Two weeks from now we may have to adjust our outlook on the market and the economy.

-James