It was bound to happen sooner or later. That is stocks having an off day with the blame being laid at the doorstep of higher commodities prices. The S&P 500 endured a small loss, ending a three-day winning streak that had sent the index to its highest level since February. The Dow Jones Industrial Average and the Russell 2000 also absorbed small losses on the day while the Nasdaq was the lone winner of the group with a gain of almost 6 points.
Speaking of commodities, gold and silver continued moves that can only be considered parabolic at this point. Maybe the metals were advancing today ahead of the Federal Reserve press event on Wednesday. That could just be a tidy reason because I am not sure either metal knows how to do anything but go higher. Gold's winning streak is now eight consecutive days and those eight days, the last six have all seen record closes for the yellow metal.
So it may not be much of a surprise that on a Monday that was extremely quiet on the mergers and acquisitions front that the one noteworthy deal of the day comes courtesy of the gold mining sector. Shares of Barrick Gold (ABX) slid nearly 7% on volume that was more than triple the daily average after the Toronto-based company announced it will acquire Equinox Minerals for $7.7 billion in cash, besting an offer for the Canadian company made by China's Minmetals Resources earlier this month by 16%. Equinox's board has unanimously approved the Barrick bid.
This deal is much more about copper than gold as Equinox owns one of Africa's largest copper mines and Barrick is already a major copper producer. The acquisition will double Barrick's current production to around 600 million pounds, Reuters reported. Still, when a chart looks the way gold's does, that means at least a few of the the well-run, large-cap miners have the currency with which to do some shopping.
Silver continues to astound as well, probably more so than gold. The white metal flirted with the $50 area early in today's session before pulling back, but even with that price retreat, we're still looking at nine consecutive days of gains for silver, the best winning streak streak in over three years, and near-record prices.
Silver's ascent has been so intense in recent weeks that the $50 price target so many analysts offered up earlier this year now looks far too conservative. Eric Sprott of Sprott Asset Management recently said silver could see $100 an ounce. That may seem far-fetched, but is this a chart to bet against?
Probably not and the options market seems to agree. On Monday, about 919,000 calls traded in the iShares Silver Trust (SLV) compared to 515,000 puts. There have been plenty of calls recently that silver is in a bubble and that inflation fears are fueling this rally and that when the bubble bursts, it is going to be ugly.
It probably will be, but it seems a lot of folks that are calling for silver's demise forget the key fact that 50% of silver demand is industrial. Silver is used to make bearings for jet engines and while Boeing's (BA) new orders are expected to be flat this year, analysts are forecasting a sizeable increase in 2012. There's one fundamental factor in silver's favor. Silver is also used in water purification systems, a high-growth area when considering that much of the world does not have access to suitable drinking water. I could list dozens of other uses for silver, that particularly in a recovering economy, should pick up, but I will just end the discussion by saying there are fundamentals in place to support more gains in silver.
Of course, the commodities sword is of the double-edged variety. Just look at the announcements today out of the consumer products sector. Dow component Procter & Gamble (PG) said it will raise prices on Pampers diapers, Charmin toilet paper and Bounty paper towels, citing rising pulp, oil and gas prices as reasons shoppers will feel more of a pinch.
Shares of P&G rival Kimberly-Clark (KMB) slumped almost 3% today on volume that was more than double the daily average after the company said its first-quarter profit 9% to $372 million, or 86 cents per share, from $411 million, or 92 cents per share, a year earlier as revenue rose 4% to $5 billion. Excluding one-time items, Kimberly Clark earned $1.09 a share. Analysts were expecting $1.17.
Last month, Texas-based Kimberly-Clark said it would raise prices 3%-7% on items such as diapers and toilet paper, but today the company again said it was raising prices on various, the third such declaration by Kimberly-Clark in barely over a month. Investors may be tired of hearing the commodities prices bit from any number of companies and shoppers are not fans of it either. Both groups have alternatives, and neither is appealing to companies Kimberly-Clark and P&G. Investors can dump the stocks and shoppers can buy store brands to save a few bucks.
Just when it was looking safe to get back in the tech waters, there was an epic disappointment after the close today from a company that can ill afford any negative surprises, that being Netflix (NFLX). The company reported strong first-quarter results after the bell, but in the essence of time, I will not highlight those numbers because the real story here is the outlook.
The company added 3.6 million new subscribers in the first quarter and over 3 million in the fourth quarter of 2010. That is great, but it also makes the stock vulnerable to disappointing news on subscriber growth an that's exactly what Netflix served up. The company is forecasting 1.3 million to 2.25 million new subscribers in the current quarter and a profit of $1.15 a share. Analysts were expecting $1.19.
Another cause for concern may be the $192 million Netflix spent on streaming rights in the first quarter, more than four times what the company spent in the comparable period a year ago. The company now has 23.6 million subscribers, but none outside of the U.S. and Canada. These are exactly the types of bullet points short sellers love when it comes to stocks with a P/E ratio of 85.
Plenty of traders have gotten burned in recent months trying to short Netflix and with good reason. The company was delivering plenty of reasons to make it dangerous to be short the stock, but the shorts may be getting their due as the disappointing outlook has Netflix down almost 5% in after-hours trading.
Looking at the charts, I am going to start with the Nasdaq for a change because I just discussed Netflix and there are a couple of big earnings reports from Nasdaq constituents tomorrow after the close. When considering how strong the Nasdaq's rally to 2820 was last week, the expectation of some profit-taking today would have been reasonable. Instead, the index was the only gainer among the major indexes today. No guarantees, but I think that changes tomorrow as the market absorbs the Netflix report.
Netflix alone will not drag the Nasdaq back to support at 2800, but if Amazon (AMZN) and Panera (PNRA) deliver strong guidance after the close, the Nasdaq could rally into resistance at 2835 leading up to the Fed event on Wednesday.
The S&P 500 offered little in the way of excitement today, trading in a range of just six points, meaning the index needs to conquer mental resistance at 1340 and then the February high at 1344 before we get to 1350 and a new round of price-target revisions from analysts. Think Fed Chairman Ben Bernanke does not know this? I do not want to diminish the impact earnings will have on the S&P 500 this week, but Wednesday will be the big day for stocks and that will have little to do with earnings. There are a bunch of oil earnings this week, but that story is pretty obvious at this point.
S&P 500 Chart
This is a monster week for Dow earnings, but leading up to the Fed even on Wednesday, I doubt the Dow runs up to resistance at 12,530, even with 3M (MMM) reporting tomorrow. As I said with regards to the S&P 500, the oil earnings story probably will not surprise many investors, so I would turn my attention to Caterpillar's (CAT) earnings on Friday as the marquee report to watch post-Fed Wednesday.
The Russell 2000's bounce off support at 820 earlier this month has been nothing short of impressive and today's meager decline did little to knock the index off a track that seems to be leading back to that old resistance at 855. I'd be watching the Russell tomorrow, particularly late in the day to see if buyers are stepping in ahead of Fed Wednesday.
Russell 2000 Chart
I wouldn't be expecting much in the way of fireworks over the next couple of days as traders will probably take it slow ahead of the Fed event. In other words, Ben Bernanke has the weight of the investing world on his shoulders. If he tells the market what it wants to hear, we'll be probably be looking at some new highs. Of course, the alternative scenario is far less attractive.