A spate of glum news reports caught up with the market today, and in a reverse of Friday's action when the Nasdaq was the only loser among the three major US indexes, the tech-heavy index was the only winner in Tuesday's trade. Technology and healthcare names tried to prop the market up, but the pressure of worse-than-expected consumer confidence data coupled with some glum earnings reports was too much for the Dow Jones Industrial Average and the S&P 500 to handle. The S&P 500 fell 0.3% to 979.63, retreating from an eight-month high and ending a two-week long rally in the process. The Dow lost almost 12 points to close at 9096.72, while the Nasdaq inched higher by 7.62 to close at 1975.51.
Market Stats Table
Tuesday's declines were not altogether surprising and I opined about the prospects for a pullback in yesterday's market wrap. Stocks barely extended their rally yesterday on tepid volume, pointing to signs of a possible drop. Fortunately for the bulls, today's retreat barely measures as a blip on the radar of the recent market rally. The S&P 500's 2.56-point drop today hardly puts a ding in a rally that has carried the index up nearly 110 points in three weeks. The Dow still hovers close to the all-important 9100 level and the Nasdaq is making its way toward 1980 so it is fair to say the bears did not make much of a proclamation today.
Still, it is impossible to gloss over one of the culprits behind today's decline: The consumer confidence survey. The Conference Board said consumer confidence fell further in July as concerns about rising unemployment continue to weigh on the minds of consumers. The market expected a reading of 49, which would have been below June's number of 49.3, but instead got doused with some cold water with a reading of 46.6 for July.
It appears that consumers are increasingly unwilling to part with their dollars and that is not good news for stocks. I mentioned yesterday that companies can only cut their way to profitability for so long before they have to actually boost revenues to appease Mr. Market. It appears that the time is now for companies to start doing just that.
Consumer Confidence Chart
Another round of good news from the housing sector was not enough to ignite the bulls on Tuesday, either. The Case-Shiller/S&P Home Price Index reported that home values jumped in May for the first time in nearly three years. That report comes on the heels of yesterday's news that new home sales increased 11% in June, so perhaps there are some signs of stabilization in the housing sector, but if they do exist, the market seemed to gloss over them today.
Case Shiller Chart
I know I may be harping on it, but it is clear the market is starting to demand more when it comes to earnings reports. The reality is it is not all that hard to beat estimates that have lowered, cut, pared and pruned to death, especially when companies are reducing payrolls the way they are. The first week of earnings season when the likes of Goldman Sachs (GS), Intel (INTC) and others sent investors hearts fluttering with joy seems it was ages ago.
Just look at some data from the fine folks at Bloomberg that shows per-share-profits have dropped on average 27% since July 17. The data shows companies reporting since then are beating profit estimates by almost 10%, but there has been nary a surpass in revenue forecasts.
Even as recently as last week, a company could report a big drop in earnings and as long as that number beat the pathetic estimates offered by the Street, the stock would probably pop a dollar or two, maybe more. That trend seemed to end yesterday as stocks like Honeywell (HON) beat estimates, but only moved up fractionally. Today, the market seemed to actually take some stocks to task for reporting punk numbers.
Take Coach (COH) for example. I mentioned the fancy handbag maker in yesterday's wrap as a stock to watch today (Just to be clear, I merely said it would be worth watching. I did not offer a bullish assessment). Coach is a luxury goods retailer, but it does have some products that are affordable for the so-called ''average'' consumer and its outlet stores have made its products accessible to denizens of new buyers. In other words, Coach is a pretty good temperature check on the consumer.
The temperature is cold apparently. Coach said fiscal fourth-quarter profit declined to $145.8 million, or 45 cents a share, from $213.5 million, or 62 cents, a year earlier. The bright sides were that sales only fell less than 1% and the stock only lost 49 cents to close at $27.53. Still, betting on the consumer is a risky proposition at this point and the chart for Coach is not too inviting.
Retail earnings will start flowing in a big way over the coming days, but even Coach and a very punk report from Office Depot (ODP), the biggest loser in the S&P 500 today, did not make retail the worst performing of the 10 industry groups in the S&P 500. That dubious distinction falls to the energy sector as a spate of oil-related names disappointed investors with sour earnings reports today. Crude oil's decline on the day did not help the cause and black gold appears to keep getting stuck in the mid-60s, hampering its chances of breaking $70 a barrel in the near-term.
On the earnings front, as I mentioned above, oil stocks of all stripes disappointed investors today. Explorer BP (BP) earned 23 cents a share, beating the average estimate of 15 cents, but profits plunged 53% and the company said it is not seeing a recovery in demand. Refiner Valero (VLO) lost 48 cents a share, good for just its first second-quarter loss in a decade. Analysts were expecting a loss of 39 cents a share. And adding to the misery was oil services giant National Oilwell Varco (NOV), another name I mentioned in yesterday's wrap and one that I have been admittedly bullish on in the past. Second-quarter net income fell 48%, but that wasn't as much as expected, and on adjusted basis, NOV earned 90 cents a share, beating analysts' estimates of 88 cents. Still, the stock was down 2.4% on the day.
With an eye towards Wednesday's action, the economic release du jour is the Fed's Beige Book survey, which surveys economic activity in the Fed's 12 regions. That news comes at 2 pm Eastern time, so volume may be light for an hour or two heading into the numbers. The Mortgage Bankers Association also releases mortgage application data before the open and it will be interesting to see if the bullish housing sector news can continue for a third consecutive day.
And in news that will surprise no one, there is, gasp, another Treasury auction on the docket tomorrow with $39 billion in five-year notes on the block. Uncle Sam hold no problem unloading $42 billion in two-year notes on Tuesday at a yield of 1.08%, showing that the appetite for US debt is as robust as ever. Expect tomorrow's auction to go off without a hitch.
Of course there are some earnings reports worth watching and one was released after the close on Tuesday. Just as retail stocks are a check on the consumer, transport names are historically a gauge on the health of the economy at large. That makes railroad operator Norfolk Southern (NSC) worth watching tomorrow. Norfolk Southern reported second-quarter profits of $247 million, or 66 cents a share, on sales of $1.86 billion. Analysts had been expecting a profit of 64 cents a share on revenue of $2.05 billion.
Railroad operators, Norfolk Southern being no exception, have been among the most voracious cost-cutters, furloughing workers and taking train cars off the tracks as demand for their shipping services has plummeted. As you can see with Norfolk Southern, those cuts may be good for beating analyst profit estimates, but they don't result in increased revenue.
The transports have been on fire recently with the iShares Dow Jones Transportation Average ETF (IYT) making a series of higher highs over the past eight weeks. Make of the chart what you will, but a near-term decline appears to be in the offing.
Other big names to watch on the earnings front tomorrow include ArcelorMittal (MT), the world's largest steel maker. Analysts are calling for a loss of 21 cents a share and US Steel (X) did not do much to inspire confidence with its report on Tuesday, posting a second-quarter loss and saying demand remains weak.
Defense contractor General Dynamics (GD) also reports before the bell and analysts expect the company to post a profit if $1.57. If Tuesday did not bring enough oil news for you, not only are oil inventories reported tomorrow, but ConocoPhillips (COP) reports before the bell with analysts calling for 85 cents a share in profits. For what it is worth, Warren Buffet's Berkshire Hathaway is one of the largest shareholders in ConocoPhillips. Refiner and Valero rival Tesoro (TSO) is expected to report a loss of 40 cents a share.
Taking a look at market technicals, I cannot say much as changed since we chatted yesterday. Yes, the Dow closed below 9100, but today's loss was tolerable. Hey, it could always be worse. With Beige Book report coming tomorrow and the GDP number looming Friday, fundamental catalysts do exist to rejuvenate the rally or spark some new selling. The 14-day RSI on the Dow inched closer to 70 today and a cross below could signal a retreat from these lofty overbought conditions. What is clear is that the bulls want to keep the Dow closing above 9000.
As I lamented yesterday, the S&P 500 is going to encounter fortress-like resistance when it gets to 1000, but no one knows when that is going to happen. Holding the 980 area would be a good place to start and the index is hovering around there, but adding more than 100 points in less than two weeks is a boffo move for sure, and that leads me to believe a breather wouldn't be such a bad thing. Just as long as 955-965 holds as support.
S&P 500 Chart
The Nasdaq is now in the 1980 neighborhood, which may offer some resistance, but nothing like 1995-2000 is going to put up. Tech has fanned the flames of this rally and if the Nasdaq starts to find slippery footing, that may be the confirmation that the market is ready for a rest.
The bottom line is Tuesday was another lethargic day and the market has not much of anything through the first two days of this week. Then again, that is not such a bad thing on a down day. If nothing else, it shows the bears are not ready to growl just yet. Mr. Market will likely pick a direction for the week after tomorrow's Beige Book news, so stay tuned.