Whee, what fun!
We got the S&P stick that kept us well and truly above 946 into the close. If we hold it for a couple of days, we won't be calling it a "stick save," we'll be saying this was the day that 946 turned from resistance to support – a good chartist needs to travel to the future, look back at today's charts and think about them in context of the follow-through move they expect. Looking further back in time, however, what we have so far is a double top on the S&P at the upper end of our primary range on very low volume. 956.23 was our June high and that still needs to be both taken out and held (preferably at decent volume) in order for us to don our rally caps for the next leg up.
I'm encouraged this morning that we may be able to do it though – CAT had great numbers, beating estimates of .22 by .38 per share, that's very impressive for what was a $35 stock yesterday. Fellow Dow component KO had a nice beat as well as did DD, MRK and UTX, That's 5 Dow beats in one day and yesterday we finished at 8,848 which is why I'm saying 8,900 or bust today. If we can't add 52 little points on these earnings, then surely the rally into these earnings was overdone. If, on the other hand, we can hold 8,900 and build from there – then perhaps we are ready to move 8,650 to the bottom of our range and look to make a 10% move over that to 9,500, a mere 32% off the highs.
I'm excited because it's almost time to pull out a brand new Big Chart with all new targets – if only we can prove this move is real. Let's not get too ahead of ourselves but I was already very pleased with last night's eanings when all 20 reporting companies beat estimates with PKG and TXN raising guidance of all things! This morning we also have both ICSC and Redbook Retail Sales reports and Bernanke gives the old Humphrey-Hawkins address to Congress against a very pretty market background which will hopefully overshadow TARP Czar Neil Barofsky, who will be reporting to Congress under the shadow of his "leaked" report that shows that the government's POTENTIAL exposure under TARP is now $23.7 TRILLION. To get to that figure, Mr. Barofsky combined direct spending with all the government guarantees and programs and assumes the "gross exposure" the government could face if all the programs were tapped to their fullest potential. It's funny but I don't recall Paulson asking Congress for $700Bn so we could assume $24Tn in debt obligations…
It kind of puts California's $26Bn debt in perspective as that's just 0.1% of the TARP obligation but, unlike the US, California seems to have finally reached a deal to get their budget under control. The deal, reached by legislative leaders after two months of frequently acrimonious negotiations, would slash spending for schools, public works and welfare programs amid the longest recession since the 1930s. If approved by the full Senate and Assembly, the agreement will also siphon money from municipalities, force companies and individuals to pay income taxes sooner and make it more difficult to receive state aid. “We came to a basic agreement, a budget agreement,” Governor Schwarzenegger told reporters outside his office last evening. “This is a budget that has no tax increases and this is a budget that is cutting spending and it deals with the entire $26 billion." deficit.”
California's neighbor to the East and major trading partner, Japan, was quite pleased with the news this morning as the Nikkei came back from a long weekend and jumped up 2.7% this morning. There was never any doubt at the 9,500 line as the index gapped right over it, did a mid-day test but then had a hell of an afternoon, adding 150 more points to close at the day's high. Tech stocks led the rally in Asia off good TXN earnings last night but the Hang Seng went flat and the Shanghai fell 1.64% but that is what we expected going with FXP protection as China, of all the world markets, seems to be a bit ahead of itself. "Much of the equity gains have come on declining volume, [indicating] confidence is still tentative," said analysts at UBS. "We ultimately think the gains will prove unsustainable on a three-to-six-month" basis. "Investors should consider taking some money off the table as we expect this rally to be interspersed with some pullbacks," said CIMB.
Europe is having yet another nice day (7 in a row) and the FTSE is teesting that 4,500 line this morning and it would be a very big deal for them to take it out. The DAX is aiming for 5,150 and the CAC need 3,500 to make it's point. Retailers and banks led the rally, which was nice as energy and metal stocsk took a break in an overnight dip in commodities that is already reversing ahead of the US open (8:30). Today it was CS's turn to push the markets higher as that bank advised investors to trim their holdings in government bonds and buy equities, reversing a recommendation from June:
Investors should increase holdings of global equities to “overweight” and reduce government bonds to “benchmark,” according to London-based global strategist Andrew Garthwaite. The VIX and investment-grade corporate bond spreads have returned to more “normal levels” and this will allow money market funds to buy into the stock market, Garthwaite told clients in a note today.
Valuations on equities are “not expensive” and consensus estimates for earnings in the U.S. are now being increased, something which precedes a rising stock market in the subsequent two to three months, he wrote. “Bonds no longer look attractive,” Garthwaite wrote. We expect “a positive macro surprise in the second half of the year. We believe that we are halfway through the first ‘V’ of an upward sloping W-shaped recovery, with a likely peak in the early fourth quarter.”
Gee, comments from MS on Asian markets yesterday morning, Goldman on the US market this morning and now CS on the European markets today – it does kind of make me think of plate spinning as they run around the globe and through the various sectors, upgrading their outlooks in a huge effort to keep everything going because we all know what happens when they stop! Now I love TXN and I do believe we will recover over time but they earned .20 per $23.50 share vs. .18 expected and that is less than 1/2 the .44 they earned last year, when the stock was at $24. IF TXN earns $1 per share (.78 estimated) this year then their p/e would be 24, which is a damn site better than QCOM (46) or INTC (36) but still a bit high for a large-cap company in an uncertain environment. At some point in this process we may have to stop spinning all these plates and see what values actually hold up when the music stops…
Still, when things go crazy we switch off our brains and watch the technicals and we only need to see 6,232 on the NYSE to have all of the major US indexes over the 40% mark, something we haven't had since early November. We want to hold the June high closes of: Dow 8,800, S&P 946, Nasdaq 1,860, NYSE 6,200 and Russell 530 and we'll be looking to take out the June intraday highs of Dow 8,878, S&P 956, Nasdaq 1,909 (yesterday's close was a new high), NYSE 6,231 and Russell 535. It was the NYSE who pooped our party in June so we'll be watching that index closely. We covered our long covers (flipping bullish) in the morning yesterday and picked up bullish plays on MTXX (bull call spread), PGF (leap), PGH (buy/write) and VNO (neutral spread) in member chat but mainly we watched the action as our bullish plays are now so far in the money that there's not much we can do with them at this point other than wait to collect the cash at expiration.
We also initiated a cover play (as we don't like to be 100% bullish) on the SPXU, the ultra-short S&P ETF. Buying options on an ultra-ETF gives you insane amounts of leverage and we went with the Sept $80s at $3.35 as we expect them to drop in half if the S&P breaks over it's levels. As it is, they should take a hit this morning and we will be looking to roll to the $75s if we can do it for .65 or less. SPXU was at $85 11 days ago and these contracts have 60 days to run so a fun play if it turns up and, otherwise, it's relatively cheap insurance against our long gains.
YHOO and AAPL earn tonight and it would be amazing if YHOO doesn't disappoint us for a change. Out of 40 companies reporting this morning only 9 did not beat expectations. They were BJS, BTU, CAL, EDU, LAB, LXK, PNR, PCP and RF. Among the winners, AKS lost less than expected, FCX crushed numbers, LMT was BTE but outlook was iffy, MRK had a huge beat, SY was encouraging and AMTD pulled out a nice quarter. So far, so good and tomorrow and Thursday hit us with another 200 reports so we should have a really good picture by the end of the week.
Until then, better keep those plates spinning!