Stocks continued their torrid run on Monday with all three major US indexes inching above critical psychological levels to close at, or close to, their intraday highs. The S&P 500, which rose 1.1% to close close at 951.13, above the oft-mentioned 950 level, now rests at its highest level since November. The Dow Jones Industrial Average turned in a triple-digit performance (the good kind), buoyed by strong runs by Caterpillar (CAT) and Alcoa (AA), both of which rose nearly 4%. The Nasdaq gained 1.2% to close above 1900 at 1909.29.
Market Stats Table
News that embattled financial services firm CIT Group (CIT) may avoid bankruptcy sparked the bulls, as did a couple of solid earnings reports from the likes of Hasbro (HAS) and Eaton (ETN). All 10 S&P 500 industry groups finished the day higher, with commodity and industrial stocks leading the way. Speaking of commodities, crude oil inched closer to $64 a barrel, closing at $63.98. Although crude oil closed up 42 cents on the day, that was not enough to cover up a pair of glum earnings reports from oil services firms Haliburton (HAL) and Weatherford International (WFT).
Speaking of crude, it appears to have established support in the $60 area. Whether or not that signals another run to $70 a barrel and beyond is another story. The national average for gas prices is around $2.47 a gallon currently, compared to close to $4 just a year ago. Inventories remain high and folks are still driving less, but it appears that stocks are responding to some stabilization in oil prices. Or maybe it is the other way around.
And speaking of oil services stocks, as I mentioned above Haliburton and Weatherford did not set the world on fire with their earnings reports on Monday. Haliburton said second-quarter profits tumbled 48%, but that was not as bad as expected. Weatherford missed analysts' estimates by reporting an 89% drop in second-quarter earnings. Combine that with some bearish options trade today in offshore driller Diamond Offshore (DO), which I highlighted in the Market Monitor, and one might expect that entire oil services was down today. That was not the case. Sure, Weatherford closed down almost 5%, but Haliburton and Diamond Offshore were both up.
The Oil Services HOLDRS ETF (OIH), which counts the three aforementioned stocks among its top 10 holdings, also finished up on the day, popping $1.46 to $102.44. The close above $100 is important, as I have lamented before, not to mention the 50-day average of $100.50 looks to be acting as support for OIH, at least in the near-term.
Another commodity that is experiencing a resurgence of sorts is copper. The bronze metal has been surging throughout July as the chart below shows and copper futures are up over 50% this year. Emerging market demand, particularly from China, has buoyed copper's fortunes this year. Copper for September delivery finished Monday at $2.47 a pound, good for a nine-month high.
That may spell good news for Freeport McMoRan (FCX), the world's largest copper producer. The company reports second-quarter results before the bell on Tuesday and analysts are expecting a profit of 69 cents a share on sales of $3.4 billion. The shares went for $16.80 on December 5th. On Monday, they closed at $57. That is an impressive run to be sure, but consider that Freeport's stock performed that well in the face of an exceptionally weak US housing market and that market is a prime destination for copper.
The market is all about earnings right now, for the most part anyway, and Freeport's results will be closely scrutinized. Sure, bulls would love to see Freeport beat estimates, but higher guidance is really what the bulls want to see here and that could send Freeport shares above $60 as soon as tomorrow and perhaps on their way to the June high of $61.55. The shares are well above the 50-day moving average at $51.25, and support probably rests in the low $55 area.
One interesting element to the market's recent surge is the performance of cyclical stocks. You know, commodities shares like Freeport and Alcoa and construction equipment stocks like Caterpillar. Alcoa, the smallest member of the Dow yet one of the largest aluminum firms in the world, rose 38 cents or, 3.7%, on Monday to close at $10.60.
Caterpillar, perhaps the epitome of a cyclical stock given its exposure to construction and infrastructure demand, received one of the more interesting upgrades you will hear about, which I highlighted in the Monitor. On Monday, Bank of America/Merrill Lynch upgraded Caterpillar to ''buy'' from ''hold.'' By itself, the upgrade is not all that noteworthy, but Caterpillar reports earnings on Tuesday and not many on the Street are expecting anything stellar in the way of upside surprises. That did not deter Bank of America/Merrill Lynch, which said that construction machine sales reached a cyclical bottom in the second quarter and that earnings do not matter as they apply to Caterpillar.
That is a bold assessment, but the market apparently agrees, at least it did on Monday as buyers sent Caterpillar shares up $2.66, or 7.8%, to $36.65. The dividend yield is tidy at 4.9%.
So it is safe to assume that Mr. Market will be picking over Caterpillar and Freeport's earnings before the bell tomorrow, but there was another important after-market profit announcement out of the semiconductor sector. Last week, Intel's (INTC) bullish after-hours report helped fuel the market for the rest of the week. After the close Monday, Texas Instruments (TXN), the biggest maker of chips used in mobile phones, said second-quarter profits fell by more than 50%, but guess what? That was not as bad as expected.
Ah, the wonders of significantly reduced earnings estimates. Sarcasm aside, Texas Instruments earned 20 cents a share on sales of $2.46 billion. Analysts had been expecting a profit of 19 cents a share on sales of $2.41 billion. Certainly not an Intel-esque beat of analyst estimates, but Texas Instruments likely shifted the Street's focus from the previous quarter's results to the current quarter by forecasting third-quarter profits of 29 cents to 39 cents a share on sales of $2.5 billion to $2.8 billion. Analysts are estimating 28 cents a share on sales of $2.53 billion.
The chart shows Texas Instruments is in the midst of undoubtedly bullish run and it will be interesting to see if investors send the stock above $25 tomorrow in the wake of this afternoon's earnings report. It is worth noting that Texas Instruments traded down in the after-hours session. Intel traded up in after-hours trade when it announced its sterling results last week.
With a light economic calendar tomorrow and 25% of the S&P 500 reporting earnings this week, I am going to keep the focus on those earnings reports. Staying in the tech sector, Apple (AAPL) reports fiscal third-quarter results after the close tomorrow. Analysts are expecting a record quarter out of the maker of iPods and iPhones with a profit of $1.16 a share. Everyone knows the superlatives that Wall Street loves to tack on Apple, juggernaut, stalwart, etc. I will just leave it to the charts below to show that iPhone and iPod sales are not likely to show any negative surprises.
In addition to Caterpillar, four other Dow components report earnings before the bell tomorrow, so it is fair to say there will be no shortage of catalysts. Chemical giant DuPont is expected to earn 53 cents a share for the second quarter. I am not in the business of making predictions, but it is worth noting that Goldman Sachs added DuPont rival Dow Chemical (DOW) to its conviction buy list on Monday. Perhaps that is a sign that the specialty chemicals sector is looking up after a brutal 2008. Either way, DuPont yields a robust 5.9%.
Drugmaker Merck (MRK) is another Dow name reporting second-quarter results tomorrow and analysts are forecasting 77 cents a share in profits. Coca-Cola (KO) also reports before the bell and analysts are calling for the world's largest soft drink maker to earn 89 cents a share. Rounding out the cavalcade of Dow earnings tomorrow, United Technologies (UTX) is expected to report profits of $1.04 a share. So yeah, the Dow is probably in for an action-packed day on Tuesday.
Not to be ignored is the financial sector. Even though bellwethers such as Goldman Sachs (GS) and Bank of America (BAC) have already delivered results, there are a few more financials slated to step into the earnings confessional this week. State Street (STT) is one to watch tomorrow. State Street is the largest US manager of assets for other institutions and one of the ''Group of 10'' banks that promptly repaid TARP loans from Uncle Sam.
While it is tough to compare State Street to Goldman Sachs, it is hard to ignore that State Street's shares have nearly tripled since March, outperforming King Goldman in the process. State Street fits in a space between money center and investment banks and fills that space quite nicely. Put another, way there are few superior major financial institutions in the U.S. at this point. Analysts are calling for 97 cents a share for the second quarter.
For those looking to extend the Goldman trade, I present you with Jefferies (JEF). Again, this is a name that is hard to draw direct comparisons to Goldman Sachs with, but Jefferies is a boutique investment bank that has done quite well for itself lately, even in a tough operating environment for companies of this nature. I guess pilfering talent from the likes of Bear Stearns and Lehman Brothers will do that. Two interesting tidbits about Jefferies that could make it worth watching: The company increased has increased its share of the global M&A advisory market this year and it did not take one red cent of money from Uncle Sam during the financial crisis.
Looking at market technicals, I talked about the importance of Dow 8800 last week and the index shot through that resistance level today with ease. While 8800 was believed to be a higher hurdle than it proved to be, significant resistance does lie ahead at 9000. That is not all that far off and with five Dow stocks reporting earnings on Tuesday, 9000 could come into play within the next couple of days. That of course depends on the news from those companies.
The S&P 500 cleared the 950 level and that is important as resistance was pegged around 940 and the close above the psychological 950 area could mean 1000 is on the horizon. You can bet that is another area of strong resistance, but if a close above that level is seen in the next week or so, you can bet bulls will run the index higher from there.
S&P 500 Chart
As if Friday's close at a nine-month high was not enough for the Nasdaq, the tech-laden index marched higher again on Monday, blasting through resistance at 1895 to close above 1900. I get the feeling that 2000 this week might be asking a bit much of the Nasdaq, but then again the catalysts exist beyond Apple's earnings. Yahoo (YHOO), eBay (EBAY), Microsoft (MSFT) and Amazon (AMZN) all report earnings this week. A close in the 1950-1960 area on strong volume could signal 2000 is near by.
It cannot be argued that 81% of the major companies that have reported earnings thus far have beaten estimates by an average of 15%. I would not want to be on the wrong end of that trend, but any downbeat surprises from some of the names mentioned here could bring the bears out of hibernation.