Market Stats

The end of the third quarter is almost upon us and stocks are holding their gains. As it stands now the market is up about +9% for the month of September, making it the best September since 1939. Energy stocks got a boost from a bullish inventory report while retailers and banking stocks proved to be a drag on the market. The U.S. dollar continues to sink, providing a lift for commodities like gold, which hit another new all-time high. The bond market edged lower following yesterday's rally. Today's Treasury auction of 7-year notes saw strong demand.

Asian markets were mostly higher. The Chinese Shanghai index closed virtually unchanged with a -0.03% decline. The Hong Kong Hang Seng rallied +1.2% to close at an eight-month high. The Japanese NIKKEI index rose +0.7% and is up +8% for the month of September. Japan's "Tankan" business sentiment survey offered a mixed outlook. Short-term expectations improved but longer-term expectations worsened. It is widely expected that the Japanese government is poised to act and sell more yen should the currency continue to strength against the dollar. Tomorrow the Ministry of Finance will report on the country's currency sales for the last month. Tomorrow is both the end of the third quarter and the end of Japan's fiscal first half of the year.

After the closing bell Nintendo issued a profit warning. The company expects revenues to fall from 1.40 trillion yen to 1.10 trillion for their fiscal year ending March 31, 2011. Nintendo also warned that its net profit would sink from 200 billion yen down to 90 billion. The company blames the huge rise in the yen currency over the past few months, a less than stellar holiday shopping outlook, and a weaker sales forecast for its new Nintendo 3DS. I read an article that explained how Nintendo was losing its mass market appeal for handheld gaming systems to the widespread adoption of smartphones and their downloadable game applications.

China was also making headlines on Wednesday when HSBC released their Chinese PMI report. This purchasing manager's index for September rose to 52.9 from 51.9 in August. This is the second rise in a row and the highest reading in the last five months. Readings over 50.0 indicate expansion and growth. The Chinese government will release their official PMI figures on Friday, October 1st and economists are expecting this report to also see a gain.

The action was less enthusiastic in Europe where stocks settled near three-week lows. The European Commission announced that their consumer and business executive sentiment figures for the 16-nation euro zone rose from 102.3 in August to 103.2 in September. Analysts had been expecting a decline. September's number is the highest reading since January 2008. Unfortunately traders were focused on the widespread protests across the region.

After the worst recession since world war two, European governments ramped up spending to pull their economies out of the hole. Now they're trying to reduce their debts and deficits but the population isn't happy with the sharp budget cuts. Belgium, Spain, Ireland, and Greece saw the biggest demonstrations. Organizers claim that 100,000 protesters marched in Brussels ahead of an EU meeting. Spain experienced its first "general" strike in eight years, which disrupted transportation and some television broadcasts. Athens experienced widespread strikes in its transportation, port, and communication industries.

Investors are worried that the growing anger over these austerity measures in Europe is going to make it tougher for some of the weaker countries to proceed with the necessary budget cuts to bring their spending in line. If investors start to lose confidence they will demand higher and higher yields on any government bonds. Spain saw its debt yields jump to new relative highs today. At the end of the day the English FTSE index lost -0.16%. The German DAX fell -0.46%. The French CAC-40 lost -0.67%.

The euro currency rallied in spite of the protests and hit $1.3628 against the dollar. At the same time the U.S. dollar plunged to a new eight-month low. It is widely expected that the Federal Reserve is going to initiate a new round of quantitative easing after the mid-term elections. This expectation continues to push the dollar lower and gold higher. Actually most of the metals are moving higher.

Chart of the FXE euro ETF:

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

Copper futures hit new two-year highs today thanks to the stronger manufacturing data out of China. Copper inventories have fallen for 31 weeks in a row, which is another contributing factor to copper's strength. Silver was another winner with a +1% gain to $21.93. Silver futures briefly traded over $22.00 an ounce, hitting a new high not seen since 1980. Silver is outpacing gold with a +30% rise for the year. Gold is approaching a +20% gain for the year. Yesterday gold settled above $1,300 an ounce for the first time in history. Today gold futures rose $2.70 to close at $1,311.00 an ounce.

Chart of the GLD gold ETF:

Chart of the SLV silver ETF:

Another commodity, oil, was showing strength today. This morning the Energy Information Administration released their weekly inventory numbers. Gasoline inventories dropped -3.47 million barrels when analysts were expecting a rise of +350,000 barrels. Gasoline consumption surged 6.1%, which is the largest increase in over six months. The EIA reported that oil inventories fell 475,000 barrels. This was a bullish surprise. The price of oil moved sharply on the report with a jump from $75.60 toward $77.50 a barrel. Energy stocks received a nice boost. The OIX oil index has rallied toward its August highs and resistance near 650 and the 200-dma. The OSX oil services index surged +2.1% to breakout to new four-month highs.

Chart of the OIX oil index:

Chart of the OSX oil services index:

Today was the only day this week without any significant economic data released so the market turned to corporate news stories. It was analyst day for Hewlett-Packard (HPQ) and the company had positive comments for its audience. HPQ is forecasting 2011 revenues in the $131.5-133.5 billion compared to estimates at $131.7 billion. Profits are expected to rise to the $5.05-5.15 a share range versus analysts' estimates at $5.01. Management said they see improving margins and plan to raise dividends and their stock buyback program. Analyst reaction was naturally positive. Shares of HPQ rallied +2.1% to close over resistance near $42 and its 50-dma.

Family Dollar Stores (FDO) was another winner today. The company reported earnings that were 5 cents better than expected with a profit of 56 cents a share. Revenues rose more than +8% to $1.96 billion. Management's guidance was in-line with previous estimates but the company issued positive guidance on expected sales in the +8-10% zone. The Board of Directors has approved a $750 million stock buyback program. Shares of FDO gapped open to hit a multi-year high at $45.01 this morning but pared its gains to settled at $44.05 (+1.6%).

Moving the opposite direction were shares of Green Mountain Coffee Roasters (GMCR). The stock gapped open lower and closed with a -16% decline over news of an SEC probe. Evidently the Securities and Exchange Commission is looking into GMCR's business with one of the company's vendors and how GMCR recognizes revenue. The stock has been soaring with a move from $22 to $38 in the last four months. Shares were trading near $5.00 back in late 2008.

Liberty Mutual was another disappointment today. The Liberty Mutual Agency Corp, a policyholder-owned insurance company, was poised to launch the biggest U.S. IPO of the year but management put the kibosh on the IPO at the last moment citing an unfavorable market environment for insurance stocks, and a stalled economic recovery. Liberty planned on raising nearly $1.3 billion in capital by selling shares in the $18-20 zone. Thus far the biggest IPO this year was Oasis Petroleum Inc, which raised $676 million. Of course these will be dwarfed by General Motors, who plans to re-IPO in November and raise $9 billion.

Another headline making the rounds today was Research In Motion's (RIMM) decision to enter the tablet PC market. RIMM actually unveiled their Blackberry Playbook on Monday (9/27) but analysts are already guessing at how this will affect Apple Inc.'s (AAPL) dominance with the iPad. Thus far there are 23 companies that are planning to build tablet PCs. Some industry insiders feel that a price war is almost guaranteed. AAPL's market share is 84% and an easy way to steal market share will be offering machines at a lower price. In addition to RIMM's Playbook the iPad will have to fend off Dell's Streak Tablet, Toshiba's Folio 100 tablet, and Samsung's Galaxy Tab, which will run Google's Android operating system.

After hours the trucking company YRC Worldwide Inc. (YRCW) announced a 1-for-25 reverse stock split. Shares of YRCW had fallen from $20 back in 2008 to almost 10 cents back in July 2010. Shares were up 7% at 32 cents today but they're trading down sharply near 26 cents in afterhours. Management plans to reduce the number of authorized shares from 2 billion down to 80 million and reduce the number of outstanding shares from 1.2 billion down to 48 million. At 25 cents, a 1:25 reverse split should put shares of YRCW above $6.00. The company plans for the reverse stock split to take effect on October 1st.

Tomorrow we have a rush of economic data. Thursday will bring the initial weekly jobless claims, and economists are expecting 457,000 new claims. We'll see the Chicago PMI, which is expected to drop from 56.7 to 56.0. The biggest event will be the third and final estimate for the Q2 GDP number, currently expected to come in unchanged at +1.6% growth. I did hear one opinion that if the GDP estimate actually drops it could be interpreted as a positive event since a decline would almost guarantee more stimulus from the Federal Reserve. Another event that could make headlines is Fed Chairman Ben Bernanke's scheduled testimony before a Senate Banking Committee tomorrow. On Friday the economic data continues with truck and auto sales, construction spending, personal shopping and income figures, the final University of Michigan consumer sentiment numbers for September, and the national ISM index.

Technically the market has not changed much. Stocks are drifting sideways. No one wants to sell as we approach the end of the third quarter (Sep. 30th). The lack of selling pressure and any last minute window dressing by fund managers has kept the market hovering at the high end of its range. Yet the S&P 500 can't find enough power to punch through resistance at 1150. After a +10% rally from its late August lows it seems like odds of some profit taking in October are pretty high. However, the beginning of the month could see another surge higher as funds put new inflows to work. Right now the bulls are expecting a Q4 market rally after the midterm elections are over. Right now the Republicans are poised to win a number of seats but win or lose it doesn't matter since just getting past the elections will remove a level of uncertainty for the stock market.

If the 1150 level holds for the S&P 500 then a correction should bring it down toward the 1100 level. However, there are so many people waiting for the correction it could be shallower than we might expect. On a short-term basis I would watch for support near 1130 and the 1120 area. We'll also want to keep an eye on the simple 200-dma near 1117. My upside target to watch is the early May peak near 1170 and of course the April highs near 1220.

Chart of the S&P 500 index:

The NASDAQ Composite is struggling with resistance near 2380. If this index can breakout then I would target resistance near 2425 and then the April highs. On a pullback watch for support near 2300 and its simple 200-dma. We also want to keep an eye on the NDX (NASDAQ-100) index, which has been exceptionally strong and is nearing resistance at its 2010 highs.

Chart of the NASDAQ index:

The small cap Russell 2000 index was a decent performer today with a new three-month high. If the rally continues we can watch for resistance near the 700, 725, and 750 levels. On a correction watch for support near 650 near the 200-dma, and the 640 level and its simple 50-dma.

Chart of the Russell 2000 index:

In summary, the trend is up, we want to buy a dip but we may not see an entry point for another week or two. Third quarter earnings season is about to start soon and that will have a big impact on market direction. Individual stocks will see huge volatility as traders react to earnings and guidance. At the same time longer-term traders are looking for an entry point with the expectation stocks will continue to climb throughout the fourth quarter but this is assuming that economic data continues to reduce fears of a double dip in 2011. On a short-term basis the midterm elections are negative for investor sentiment but once the elections are over it will be a positive since investors will have a better grasp of what to expect from Washington.