U.S. stocks rebounded from Thursday's down draft, the biggest losing day in a year, on news that Germany approved its share of the $1 trillion European bailout package and investor sentiment that indicated recent selling was a bit overdone.
After losing 376 points on Thursday and seeing all 30 of its constituents finish that day lower, the Dow Jones Industrial Average gained 125 points on Friday to close at 10,193.39. The only Dow components to finish the day lower were AT&T (T) and Microsoft (MSFT). The S&P 500 gained 16.1 points to settle just below 1088 and the Nasdaq finally showed some signs of life, adding 25 points to close at 2229.04. All around, a good one-day performance, but not enough to keep the Dow and S&P 500 from losing more than 4% on the week. The Nasdaq was down more than 5% for the week.
As I have been saying all week, riskier assets have not been in favor, but for one day at least, they seemed to be back in vogue. The Euro rose the most in eight months against the U.S. Dollar as forex traders unwound bearish positions on the pair. The Euro had been hovering near four-year lows against its American counterpart for most of the weak and plenty of pundits were calling for a technical bounce.
Short-covering was another catalyst to boost the Euro on Friday. It is hard to be short any security that can be considered ''high beta'' heading into the weekend these days. After all, you never know what kind of news is going to emerge from the Eurozone. That said, short-covering and a technical bounce do not represent changes to the Euro's fundamentals. In other words, the common currency is far from out of the woods and it could be just stabilizing or consolidating before another leg lower starts to form.
There are other interesting goings on among other major currencies as well. Both the Australian Dollar and Swiss Franc saw substantial declines this week, prompting speculation that the central banks in those countries intentionally intervened in the currency market. The difference being the Reserve Bank of Australia would do so to prop up its currency while the Swiss National Bank would move to weaken the Franc against the Euro.
Speaking of riskier assets, the one-day respite from fretting over Europe and the strength of the global economic recovery helped select commodities enjoy some bullish trade on Friday. In the case of crude oil, the trading was just less bad (and only moderately so) than it had been over the past several days. The July contract made its debut on Friday, falling 76 cents, or 1.07%, to $70.04 per barrel. For those bullish on oil, seeing crude futures continue to tumble on day when stocks moved higher is not an encouraging sign.
Decoupling of equities and oil is problematic for oil bulls because the two asset classes share an intimate correlation with each other, at least a fair amount of the time. Remember oil prices plunged along with stocks in late 2008 and early 2009 only to rebound with equities off the March 2009 lows. More recently, the S&P 500 and crude prices moved in tandem about 90% of the time in the past month, according to Bloomberg News.
That is below the 94% correlation level seen in mid-March, but you get the picture. Actually, this is really a case of what comes first, the chicken or the egg? Energy stocks account for about 11% of the S&P 500's sector weight and the index is cap-weighted, meaning the companies with the biggest market caps account for the biggest percentages of the index. That means Exxon Mobil (XOM) is the most prominent member of the index.
Bottom line: Do not expect a lot of days of stocks moving higher while oil moves lower and vice versa.
Copper prices did catch a bid on Friday, rising the most in three months on news that China will continue its voracious appetite for the red metal. The world's largest country imported almost 310,000 tons of copper last month, but copper prices had been hammered as risk appetite waned due to the European debt crisis.
Copper for July delivery gained 11.65 cents, or 4%, to close at $3.061 on Friday, but copper futures are still down almost 9% this year, due in large part to declines in China's equity markets.
There was plenty of positive trade to go around in the materials sector on Friday, a welcomed change for a group that has suffered mightily at the hands of Europe's debt contagion. In the past month, the iShares Dow Jones US Basic Materials ETF (IYM) and the Materials Select SPDR (XLB) are down about 12% while the Market Vectors Coal ETF has been thrashed to the tune of 20%. All three were up at least 2.46% on Friday.
In terms of individual materials names, Bucyrus (BUCY) was up almost 6% while Cliffs Natural Resources (CLF) and Joy Global (JOYG) gained almost 7%. The materials sector was so strong that even embattled Massey Energy (MEE), whose executives were on Capitol Hill earlier this week attempting to atone for the Upper Big Branch mine tragedy, gained almost 4%. Not to be outdone was one of my old favorites, Freeport McMoRan (NYSE: FCX). Freeport gained 5.3% on Friday, but that does not hide the fact that the stock was flirting with $90 in early April. The shares closed at $67.01 on Friday now reside almost exactly in the middle of their 52-week range.
Financials were another sector seeing some relief on Friday. The Senate passed its version of the financial reform bill on Thursday night, putting Congress on the doorstep of passing the most substantive reforms for this industry in seven decades. The House and Senate must reconcile their bills and press reports are saying Democrats hope to have the bill on President Obama's desk by early July.
Financials' move higher on Friday was a case of markets liking clarity mixed in with some buying in yet another sector that may qualify as oversold. Bank of America (BAC), JPMorgan Chase (JPM) and Goldman Sachs all traded higher by at least 3.3% on Friday despite the fact that this bill does propose a host of tighter controls on the banking industry.
At the least industry now knows reform is imminent and the market can price that into these stocks if it has not done so already. The House version of the bill seeks to collect $150 billion in fees from banks for use in liquidating a failed financial version, but at their core, both the House and Senate versions are attempting to make sure if another Lehman Brothers scenario occurs, the failed institution will not roil markets the way Lehman's collapse did.
The Senate bill does place tighter restrictions on proprietary trading, a major source of revenue firms like Goldman and JPMorgan, and other speculative activity and instruments like credit default swaps, so it may have been surprising to see that financials were the biggest gainers among the S&P 500's 10 industry groups on Friday. At the end of the day, the banks know what they have to deal with and that was apparently worth something on Friday. Shares of Mastercard (MA) were even upgraded by Oppenheimer to ''buy'' from hold'' following the news and that helped the stock gain 4.1% on the day.
Adding to the Friday cheer was some mergers and acquisitions news. I guess the companies involved could not wait a few more days to announce the news on Merger Monday, but that is their pregogative and by Friday, the market could have used good news in any form. Sanford C. Bernstein published a research note at the end of 2009 indicating that global M&A activity would pick up by about 35% this year and while I am not sure exactly what the pace is on a percentage basis thus far in 2010, M&A activity has been brisk and is rebounding from a recession-induced decline.
On Friday, Abbott Laboratories (ABT) said it would acquire India's Piramal Healthcare, a generic drug producer, for $3.7 billion. Abbott will pay $2.12 billion to start then $400 million a year for four years. Acquiring Piramal makes Abbott the top pharmaceutical firm in India, Asia's second-fastest growing economy and the second-largest country in the world by population, with a 7% market share. The company expects $8 billion in sales from India this year and for that total to double by 2015.
Abbott will use some of its free cash to fund the purchase and the company said it did not expect the transaction to affect earnings estimates. This is Abbott's second major international purchase this year after acquiring Belgium's Solvay Pharmaceuticals for $6.2 billion in February, another purchase aimed bolstering Abbott's presence in emerging markets. Emerging markets now account for about 20% of Abbott's sales.
Most of the major European and North American pharma companies are pushing their way into emerging markets these days. A smart and necessary move given increased competition from generic pharmaceuticals firms, weak new product pipelines and the long list of expiring patents big pharma companies have to contend with.
In other M&A news, auto parts maker Johnson Controls (JCI) offered $1.25 billion for rival Visteon (VSTNQ). Notice the ''Q'' in the ticker there. That means Visteon is currently in Chapter 11 bankruptcy. Johnson Controls said the deal, if an accord is ever reached, would help it boost its presence in China.
Visteon is apparently leery of the offer, saying information on critical details is lacking and it could just be a way for Johonson Controls to drag a vulnerable rival out of bankruptcy. Visteon call the offer ''highly conditional and vaguely defined.''
Visteon said it has had ''difficult'' dealings with Johnson Controls in the past and that it is possible that the latter is trying to muck up the former's bankruptcy proceedings, which according to Visteon are at a critical point. I never thought of the auto parts sector as one with a flair for the dramatic, but that may be changing.
Johnson Controls Chart
Another sector benefiting from the ''it may finally be time to do some buying'' theme was the oil services group. Diamond Offshore (DO) was another name that Oppenheimer upgraded on Friday, helping the shares gain almost 4%. Oppenheimer said the recent tumble by oil services names ''could represent a buying opportunity.'' That helped the Oil Services HOLDRs ETF (OIH) jump $2.70, or 2.68%, to $103.52. The ETF has lost more than 20% since the April 20 explosion at the Deepwater Horizon rig in the Gulf of Mexico.
In earnings news, semiconductor maker Marvell Technology (MRVL) added $1.48, or 8.3%, to settle at $19.32 after the company reported firs-quarter results that handily beat Wall Street estimates. The maker of circuits used in the BlackBerry mobile device also surprised investors by forecasting second-quarter revenue of $900 million to $930 million, well above the Street estimate of $864.8 million. Marvell said new products from BlackBerry maker Research In Motion (RIMM) are helping drive second-quarter growth.
Looking at the charts, it looks like the lows brought about by the May 6 flash crash acted as support on Friday because the major U.S. indexes did open lower and it looked like Friday was going to be another bloody day. In fact, the Dow was down by triple digits early in the session before reversing course. Friday's gain was still not enough to get the Dow back above its 200-day moving average at 10,262, which is likely the next resistance point.
From there, previous support levels that we previously discussed are likely to turn into new resistance. I am talking about 10,350, 10,500, 10,750, etc. Of course that assumes that the bulls are ready to take control again. If the Dow does not hold above 10,000, I would still be looking at 9850-9875 as I mentioned on Thursday.
Similar comments can be made about the S&P 500. The 1100 area faltered as support, but the index was able to move above 1085 yesterday. Assuming that old support area turned into new resistance, it was a positive sign to see the index move back above that level. Now 1100 needs to be dealt with again. The S&P 500 had some problems just over 1100 in January, but took out that resistance relatively easily in March, but I am not betting on an easy road back to 1200 this time around.
The best thing that can be said about the index's behavior on Friday is that a bounce of 1065 was seen and 1050 was never in question.
S&P 500 Chart
At least the Nasdaq was able to reclaim its 200-day line on Friday, though it is probably little compensation for tech bulls that have been punished mightily in recent weeks. I am very apprehensive about suddenly turning bullish on tech just because of one decent day and even if the Nasdaq can find its way back above 2250, the index is going to face formidable resistance at various points if it hopes to add another 100 points from there. Overall, if the market weakens against next week, I still think 2185 is going to come into play.
As for small-caps, I noted on Thursday that the Russell 2000 needed to find support at its 200-day line or risk being punished even more. Well, the index did bounce off that area, around 628, and closed just below 650, which could prove to be a new resistance point. I would be very cautious around the 650 area on the Russell 2000. No matter how you slice it, the index gained just over 1% on Friday after shedding more than 5% on Thursday and that is not a bullish two-day trend.
Russell 2000 Chart
We all know the old expression that stocks do not move up in a straight line and they do not always fall without some faint attempts by the bulls to stop the declines. The selling was probably a tad overdone heading into Friday and there were some headlines for stocks to benefit from, along with an options expiration day. I am going to wait for confirmation that a real rally is starting again before changing my tone. As I said earlier, unless oil starts to firm up, any move higher for equities could be short-lived.