Market Stats

The stock market stumbled out of the gate this morning as investors reacted to a bounce in the U.S. dollar, commodity weakness, and concerns over the Fed's expected quantitative easing next week. The economic data today was mixed with the durable goods orders suggesting the manufacturing sector in our economy is starting to lose momentum. New home sales were better than expected. At the end of the day a string of better than expected earnings results from the technology sector helped buoy the markets and lift the NASDAQ and the semiconductor index (SOX) into positive territory.

Everyone expects the Federal Reserve to launch a new round of quantitative easing (QE2 for short) at the FOMC meeting next week. These expectations are so big they have been powering the stock market rally for several weeks now and pushing the U.S. dollar lower. Bank of America is forecasting the Fed to announce a $1 trillion QE program. The minds at Goldman Sachs believe the Fed will embark on a $2 trillion program but most estimates seem to fall in the $500 billion to $1 trillion range. Thus investors were a little uncomfortable this morning when the Wall Street Journal released their opinion that the Federal Reserve will be much more timid in their QE2 plans. Instead of announcing some huge "shock and awe" number (in the trillions) the WSJ is suggesting the Fed will only announce a $250 billion program as the first step. This way the Fed can slowly roll out $250 billion chunks if they feel the need to and at the same time they can end the program when the economy improves.

Honestly today's opinion by the WSJ and market reaction to it could be a good thing. I have been concerned that expectations are so big for the Fed's QE2 announcement that the market would likely correct sharply in a typical sell-the-news sort of move no matter what the Fed says. Now the WSJ has helped adjust investors expectations (a little) that the QE2 news next week may not be the panacea we've been expecting. Of course the real impact of more QE was always open for debate. The WSJ report today had an impact on the dollar, commodities, and the bond market.

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

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

Chart of the GLD gold ETF:

The dollar saw a decent bounce as traders reacted to the WSJ report. If the QE2 program isn't big enough then the dollar has probably been oversold. The dollar bounce sparked additional profit taking in commodities and commodity-related stocks. Gold futures lost $16.00 to close near $1,322 an ounce. Silver prices retreated -1.79% to $23.40 an ounce. Copper prices slipped from 27-month highs with a -2.4% pull back. Crude oil also felt the dollar's gain as oil prices dropped -0.74% to close under $82.00 a barrel. The weekly EIA oil inventory numbers also contributed to oil weakness. Economists were expecting a one-million barrel gain in inventories and the EIA said oil supplies jumped five million barrels.

Reaction to QE expectations and the dollar's strength was also evident in the U.S. bond market. Bond yields move higher as bond values decline and the 10-year treasury bond fell for the sixth day in a row - the longest decline in two years. Yields on the 30-year treasury note closed above 4% for the first time in several weeks. The 10-year yield hit 2.71%, which is a big move from the 52-week low of 2.33% just over two weeks ago. Comments from the very influential Bill Gross of PIMCO definitely made headlines today. Mr. Gross manages PIMCO's Total Return Fund, the largest mutual fund in the world with assets of more than $255 billion. In his comments released this morning Gross suggested that the Fed's QE2 will probably end the 30-year bull market in bonds. If the Federal Reserve is going to print trillions of dollars to pay for this QE then it will definitely create inflation. Gross actually called the Fed's QE2 program "somewhat of a Ponzi scheme". Investors are growing more worried about inflation and the recent 5-year TIPS auction of inflation-protected securities, actually sold with a negative yield this week.

Chart of the Yield on the 10-year U.S. Bond:

Markets overseas were generally lower today. The drop in commodity prices fueled profit taking across Asia. The Chinese Shanghai index lost -1.4% and the Hong Kong Hang Seng fell -1.85%. The Japanese NIKKEI managed to close in positive territory thanks to the dollar's bounce against the yen. Gains in Japan were limited by weakness in the banking sector.

The major European markets were down across the board. Stocks rallied from their morning lows but the lunchtime gains faded into losses and Wednesday delivered the biggest drop they've seen in weeks. Market weakness was accelerated by the disappointing durable goods data in the U.S. and the WSJ report on QE2. Earnings disappointments from large European companies like SAP and Heineken didn't help. The Greek market lost -1.9% after the country's Finance Minister said their review of the 2009 budget showed Greece's deficit was actually higher than 15% of their GDP. At the end of the day the German DAX slipped -0.69%. The French CAC-40 fell -0.9% and the English FTSE lost -1.07%.

There were two economic reports out this morning, the Durable Goods orders and the new home sales data. The Commerce Department said durable goods orders rose +3.3% but that was fueled by big gains in civilian aircraft demand. Economists were only expecting a +2% rise. Yet excluding +15.7% jump in transportation the durable goods orders actually fell -0.6%, which follows a +4.8% rise in August. This is another sign that the manufacturing sector in the U.S. is slowing down. Looking at the details in the report the shipments of durable goods dropped -0.4% after a -1.4% decline in August. Inventories continue to climb and September saw inventories grow +0.5% for the ninth monthly gain in a row. The very volatile transportation sector jumped +15.7% in September following a -8.8% decline in August. Drilling down even further most of that move was fueled by a +105% increase for civilian aircraft last month. Overall it was a disappointing report since the manufacturing sector had been a bright spot in the economy the last several months.

Economists were expecting September new home sales to grow +4.1% from 288,000 in August to 300,000 in September. The Commerce Department announced that sales actually hit an annual pace of 307,000 last month (+6.6%). While it is improvement we're still very low and close to the all-time low of 282,000 set back in May. Demand for homes has crashed following the expiration of the new buyer tax credit. Back in April new home sales were at the 414,000 pace. Sales prices did improve +1.5% from August and up +3.3% from a year ago with the average new home at $223,800. Unfortunately the uptick in bond yields will put pressure on mortgage rates, which have been sitting near all-time lows. Rising rates won't help the housing market heal. Honestly, I'm not sure why anyone even bothers with this report since the margin of error is plus or minus almost 17%.

We are still in the middle of Q3 earnings season and corporate rules played a big part in today's market. Technology names continue to perform very well and buoyed the NASDAQ throughout the session. There were several companies reporting after the closing bell last night that saw big moves today and then a number of big reports this morning. I'll try and touch on them briefly. Aflac Inc (AFL) was up +2.1% to a new six month high after beating earnings by seven cents last night. Education stock DeVry Inc. (DV) soared +7% following its earnings beat last night. Jones Lang LaSalle (JLL) crashed -11% when the company missed estimates by 11 cents but beat on revenues. Broadcom (BRCM) soared +11.6% to new multi-year highs after reporting earnings last night that beat the street by five cents. BRCM management guided Q4 higher. Compellent Technologies (CML) rallied to a new three year high (+32% today) after reporting earnings yesterday that beat estimates by 11 cents.

Keeping the tech streak alive was F5 Networks (FFIV), which skyrocketed +14.6% to a new all-time high. FFIV reported earnings 7 cents better than expected and guided Q1 higher. FFIV management also announced a $200 million stock buyback program. JDA Software Group (JDAS) sprinted to its 200-dma before paring its gains to close up +12.9% following its better than expected earnings last night. NetGear Inc. (NTGR) rallied +12% to new two years highs after beating the street on profits and revenues and guiding higher. RF Microdevices (RFMD) closed at a new three-year high with a +15% gain following yesterday's earnings report where the company beat estimates on both earnings and revenues.

This morning investors were digesting earnings from Sprint, ConocoPhillips, Procter & Gamble, Northrop Grumman, and Whirlpool. Energy giant Conoco (COP) reported a profit of $1.50 a share, besting estimates of $1.46 but the stock dropped -1.2% likely due to oil's weakness today. Procter & Gamble (PG) eked out a very minor gain following its earnings of $1.02, which beat the street by two cents. PG's revenues were a minor miss at $20.12 billion but the company offered relatively bullish guidance for 2011. Defense contractor Northrop Grumman (NOC) closed virtually unchanged on the session near its 200-dma after reporting earnings of $1.64 a share. This beat Wall Street's estimates by 18 cents with NOC's revenues rising to $8.71 billion versus estimates of $8.56 billon. Sprint (S) saw its stock plunge nearly -10% after missing estimates by two cents with a net loss of -$0.30 a share. Whirlpool (WHR) spiked lower this morning but pared its losses to just -4% in spite of crushing the earnings number. Wall Street was looking for WHR to deliver 88 cents on $4.49 billion in revenues. WHR reported $1.02 in profits on $4.52 billion in revenues.

Looking at the market's major indices it appears that upward momentum is slowing fading. In truth I agree with Jim's assessment last night. There are only two trading days left in the month of October and yearend for many mutual funds. The market will likely drift sideways letting stocks close near their five-month highs, which will make your mutual fund statements look good and help ensure some yearend bonuses for fund managers.

On a very short-term basis the S&P 500's failed rally on Monday looks like a potential short-term top. Yet at the same time the S&P 500 saw a mini (bullish) double bottom today near 1172. The 1172-1173 zone was prior resistance. Take a step back and the S&P 500 still has a steady trend of higher lows and higher highs over the last several weeks. Yet if you step back even further the rally is slowing as it nears potential technical resistance at the 200-week moving average (see weekly chart below).

Short-term, if the 1172 level fails we can look for support near 1160. Overhead the S&P 500 probably has resistance near 1200 and then the 1220 level.

Daily Chart of the S&P 500 index:

Intraday Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

The tech-heavy NASDAQ continues to rally thanks to a very strong earnings season. The NASDAQ Composite index has managed to rally toward round-number, psychological resistance near 2500. I wouldn't be surprised to see a last gasp spike toward the 2010 highs near April's close of 2530. You already know the NASDAQ and the NASDAQ-100 index (NDX) are very overbought and way overdue for a correction. On a short-term basis we can look for the NASDAQ Composite to find resistance near 2525-2530 and support near 2450 and 2400.

Chart of the NASDAQ index:

The small cap Russell 2000 index ($RUT) has stalled under resistance near the 710 level. The eight-week trend is still higher but momentum has clearly paused. For the moment the $RUT still has a bullish trend of higher lows. Small caps tend to be more volatile than the big caps so when the market does correction I would expect a pull back toward prior resistance near 670.

Chart of the Russell 2000 index:

I also want to point out that the Dow Jones Transportation index has rallied to resistance at its 2010 highs near 4800. Meanwhile the SOX semiconductor index has continued to rally with a strong move today (+3%) thanks to better than expected earnings news in the sector. The SOX is now testing resistance near 370 and is close to breaking the bearish trend of lower highs.

Chart of the Dow Jones Transportation index:

Chart of the SOX semiconductor index:

In summary, the market's trend is still up but momentum has slowed significantly. Money managers have already placed their bets ahead of the midterm elections and the FOMC meeting next week. We only have two trading days left until the fiscal year ends for most fund managers. Plus we only have four trading days until the elections and five trading days until the conclusion of the next FOMC meeting. The announcement on QE2 is expected around 2:00 p.m. on Tuesday, November 5th. You can bet we'll see some market volatility that afternoon and the following day. Until we get to November 5th I would expect stocks to slowly drift sideways.