Market Stats

Negative reaction to China's surprise rate hike on Tuesday died quickly as fears eased that Beijing would slow down their economy too fast. Stocks here and across the Atlantic saw a very widespread bounce. U.S. dollar weakness was fueling big moves in commodity names. Better than expected earnings results from Dow-components Boeing (BA) and United Technologies (UTX) helped drive the DJIA back above the 11,100 level. Very bullish earnings in the airline sector helped lift the XAL airline index to new three-year highs and gave the Dow Jones Transportation index a nice boost. Financial stocks were still laggards as investors worry over efforts to force big banks into buying back billions of bad loans. Meanwhile the Fed's Beige Book report only showed modest growth. Traders decided to interpret the data as confirmation that the Federal Reserve would proceed with their plans to launch another round of quantitative easing (better known as QE2 these days).

Asian markets were mixed. The Japanese NIKKEI was still reeling from China's surprise rate hike and the Japanese market sank -2.3% intraday with the NIKKEI closing down -1.7%. I'm sure the dollar weakness with a drop to under 81.0 yen intraday certainly played a roll in the stock market's weakness since a weaker dollar makes Japanese exports more expensive. In China the market was poised to drop but the Shanghai index rebounded from its early morning weakness to close in positive territory. Yesterday was China's first rate hike (+0.25%) in almost three years. Initially investors were worried that China would cause their economy to stumble. Fortunately the market recovered and the Shanghai index inched up +0.7% to close at 3,003. The Hong Kong Hang Seng index lost -0.8%.

European markets saw widespread gains as stocks rallied off their morning lows. Metals, miners, and commodity-related plays were big winners thanks to the dollar's reversal lower. The minutes from the recent Bank of England meeting affirmed expectations that the BoE was still leaning towards additional quantitative easing. Unfortunately, gains in England were tempered by some of the deepest budget cuts the country has ever seen. The U.K. plans to cut 500,000 government jobs and impose further taxes on the banks in an all-out effort to eliminate the country's 156 billion pound deficit. The English FTSE rose +0.44%. The German DAX gained +0.5%. The French CAC-40 rose +0.5%.

It seems that these days trading is all about the U.S. dollar with concerns over currency wars and devaluations as countries try to stay competitive in the export market with a plunging dollar. The stock market has seen a relatively strong correlation with the dollar's move as dollar weakness bolsters stock gains. Today the dollar hit a new 15-year low against the yen, closing near 81.0 yen and hitting 80.85 intraday. The dollar's reversal lower today ended a three-day bounce against the euro with the euro rising toward $1.3958. The $1.40 level has been resistance and there is definitely speculation that a breakout past $1.40 on the euro would launch a new leg higher.

Yesterday's dollar declines sparked sharp profit taking in the commodity space. Crude oil lost -4.3% yesterday while gold plunged -2.6%. Today's decline in the dollar lifted oil +2.9% to $82.55 a barrel with a little help from the EIA report that showed a smaller than expected build in oil inventories last week. Metals saw a strong bounce on dollar weakness with copper up +1.2% and gold futures up +0.8% to $1,346.50 an ounce. The dollar's decline was also having a big impact on agricultural futures with corn up +5%, cotton +3.6%, oats +2.9%, rice +3.4% and soybeans hitting new 16-month highs. A weaker dollar makes U.S. exports of grains more competitive. Plus a weaker dollar means you need more dollars to buy the same bushel of corn.

The major economic report today was the Federal Reserve's Beige Book report, named for the color of its cover. A big picture look at the nation showed growth was modest. Seven of the 12 Fed districts reported modest improvements in business activity. Three regions said activity was flat while two regions, Atlanta and Dallas, said growth was slowing down. The Fed pointed out that businesses are still reluctant to hire new workers. Naturally our high unemployment is keeping the housing market weak with only scattered reports of mild improvements for residential real estate. Speaking of homes, the Mortgage Bankers Association weekly look at mortgage applications saw their index drop for the first time in six weeks. The application index fell -11% for its biggest drop since June led by a -11% in refinance applications and -6.7% drop in new purchases.

Most of the headlines today that weren't focused on the Beige book or the dollar were all about earnings. This earnings season has been much better than expected and results continue to prop up the market, even if they do take a back seat to the dollar's moves. Today the airline sector was soaring on strong earnings from three large carriers. American Airlines (AMR) ended a string of seven quarterly losses and reported a profit of $0.39, which was seven cents better than expected. Revenues jumped almost +14% and matched estimates at $5.84 billion. Delta Airlines (DAL) delivered a profit of $1.10 a share, which bested estimates of 94 cents. DAL's revenues grew +18.2% to $8.95 billion, besting estimates. Management issued bullish comments for growth through the end of 2010. U.S. Air (LCC) announced a profit of $1.22 a share versus a loss of 60 cents a share last year. Analysts were only expecting $1.17. LCC's revenues grew nearly +17% to $3.18 billion. Together the three airlines said average ticket prices were rising and traffic was healthy thanks the return of the business traveler and strong demand for international flights. Big gains for these three companies (AMR +12.5%, DAL +10.8%, and LCC +7.4%) helped push the XAL airline index (+5.2%) to new three-year highs.

Chart of the XAL airline index:

In related news Boeing Co. (BA), one of the world's largest manufacturers of commercial airplanes, rose +3.3% on its earnings report. Profits for BA came in at $1.12 last quarter with revenues hitting $16.97 billion. Wall Street was only expecting $1.06 a share on revenues of $16.81 billion. BA said demand had improved and management raised their forecasts. Another Dow-component reporting earnings this morning was UTX. Earnings came in at $1.30 a share, which beat estimates by 2 cents. Revenues were a miss but UTX narrowed its 2010 full year forecast toward the top of its previous range. The stock initially gapped down this morning but managed to bounce back into positive territory with a +0.4% gain.

Financials remain in the spotlight as investors struggle over headline risk with the major mortgage lenders. The markets are worried that growing efforts to force the banks to buy back billions of mortgages will succeed. Bank of America (BAC) is the biggest target and two firms downgraded the stock today. Shares of BAC tagged new 52-week lows this morning before paring its losses. Outperforming its peers was Wells Fargo (WFC), which reported earnings this morning of $0.60 a share on revenues of $20.87 billion. The street was expecting a profit of 55 cents on revenues of $20.95 billion. While the revenue number was a miss the $3.34 billion in net income was a new all-time high for WFC. The stock rallied +4.2%. Another financial company making headlines was Morgan Stanley (MS), which reported earnings of just 5 cents per share. Wall Street was looking for 15 cents a share. MS' revenues dropped nearly 20%. Trading revenues plunged from a year ago and yet in spite of these numbers the stock closed virtually unchanged on the session. Larger rival Goldman Sachs (GS) delivered a very strong earnings report yesterday and the stock rallied +1.8% today to set a new five-month closing high just under $160 a share.

In other news Amlyn Pharmaceuticals (AMLN) and Apple Inc. (AAPL) were making a splash. Shares of AMLN were nearly cut in half with a -46% drop to $11 on news that the FDA had rejected AMLN's once a week diabetes drug, Bydureon. AMLN is trying to compete with a similar drug, Victoza, manufactured by Novo Nordisk. AMLN's shares were not the only ones hurt by the FDA announcement. Eli Lilly (LLY) and Alkermes (ALKS) both had a stake in Bydureon. ALKS fell -27% to $10.50 and LLY dropped -3.8% to $36.01. The FDA has requested more information on how this new drug affects patients heart rate and any new decision has been postponed until mid 2012.

Chart of the Amlyn Pharmaceuticals (AMLN):

Shares of AAPL are hovering near their all-time highs. The stock only managed a +0.33% gain as investors digested the "Mac Event" scheduled today. CEO Steve Jobs unveiled Apple's new operating system called "Lion" and introduced two new MacBook Air models that weigh less than three pounds and have a battery life of seven hours. The new Macs also include "FaceTime" video similar to the new iPhone 4 video chat.

After hours the earnings results continued to pour in. Topping the tape were Ebay Inc. (EBAY) and Netflix Inc. (NFLX). EBAY reported earnings of 40 cents a share, which was three cents better than expected. Revenues improved to $2.24 billion, better than the $2.18 billion estimate. PayPal continues to be EBAY's crown jewel with strong growth. Management has raised their Q4 guidance to 45-48 cents a share, above consensus estimates of 44 cents. Shares of EBAY are up nearly +7% in after hours. Shares of NFLX are also trading up about +7% after hours as traders react to its earnings report. The company has raised its full-year subscriber forecast from 17.7-18.5 million up to 19.0-19.7 million. There seemed to be some confusion over the earnings results. Wall Street was expecting 71 cents a share. CNBC couldn't decide if NFLX had earned 70 cents or 78 cents. Revenues clearly beat with Q3 revenues of $553 million compared to the $550 million estimate. NFLX said they were seeing strong growth in their streaming video service.

Taking a step back to look at the market, technically, not too much has changed. The trend is still up and traders quickly bought Tuesday's dip. Stocks remain very overbought and due for a correction but that may not happen until after the elections. However, yesterday's sharp decline and the bounce back today does suggest a potential crack in the bull's armor. The rebound on Wednesday paused under yesterday's close and stocks began to wane late in the afternoon. I urge you to take a closer look at the intraday charts. Like I said, the trend is up, but if stocks struggle to make it past the highs this week we might be seeing a change in character.

On a short-term basis the S&P 500 index has resistance near 1185. Yesterday proved that 1160 was short-term support but I would watch the 1150 level as stronger support. A breakout past 1185 would leave the index open for a quick rally toward round-number resistance at 1200.

Intraday Chart of the S&P 500 index:

Chart of the S&P 500 index:

The NASDAQ composite is holding up pretty well and has yet to breakdown under its rising 10-dma. On a short-term basis we can look for support near 2420 and 2400 and overhead resistance at 2480 and 2500.

Chart of the NASDAQ index:

Meanwhile the small cap Russell 2000 index continues to march along. The index has been moving higher in a tight channel. Yesterday's close looked like a breakdown but there was no follow through. It might take a close under the 690 level before we actually see any real profit taking in the small caps. Until then the bulls are aiming for the 720 level.

Chart of the Russell 2000 index:

Tomorrow's economic data will be led by the Philly Fed survey and leading indicators. Plus, we'll see the weekly initial jobless claims. Economists are expecting new claims to come in at 450,000 last week. Odds are good the real headlines will focus on earnings data. Topping the list of companies reporting tomorrow are McDonald's (MCD), Amazon.com (AMZN), Caterpillar (CAT), and American Express (AXP). Thus far the number of S&P 500 components that are beating earnings expectations is up to 84%.

Personally I find it very challenging to want to buy stocks at these levels with the potential for a correction looming so large but nothing seems to keep this market down for very long. Negative economic data and earnings misses over the past couple of weeks haven't been able to spark any serious profit taking and even a surprise rate hike by China was quickly waved off as healthy. The trend of dollar weakness and commodity strength remains intact. Obviously we would prefer to buy a nice -5% or -10% correction but it may not happen until after the midterm elections and the next FOMC meeting. You would think that after the big gains we've seen so far in September and October that expectations for the Federal Reserve to launch another round of QE are completely baked into this market. Yet the QE yeast continues to rise. If you don't mind me mixing my baking metaphors, I'm worried that when the Fed finally does meets in early November we might hear this whooshing sound as the stock market deflates like an undercooked soufflé.

-James