Comtex SmarTrend(R) Morning Call -- August 23, 2010
The trade-term trend rally expected Friday did not materialize until after lunch following further selling of equities in the morning due to persistent fears the economic recovery was evaporating. The DJIA had fallen 124 points by lunchtime, but ended the day closed down 58 points at 10,213. The SmarTrend(R) indicators retreated downward again in the face of increased selling pressure; the trade-term trend is likely to continue upward this morning, but its lift likely will be insufficient to correct the losses of late last week.
After a season of relatively strong corporate quarterly earnings reports, selling pressure increased in tandem with a string of economic reports that signaled at least a slowdown in the recovery. Now the market finds itself looking for a catalyst for a new rally. The lack of liquidity is no longer the main cause the economic growth has slowed. What the economy is desperately short of is confidence and investment leadership - the willingness of businesses to take risk. The result is lower stock prices, which phenomenon was epitomized Friday when daily SmarTrend(R) uptrends to downtrends were polarized strongly to the downside at 15:196, despite the late intraday rally. This increased selling pressure during a period of decreased buying force caused any lifting by the intermediate-term uptrend to cease as the IBDI and Trend Ratio both declined. Furthermore, neither indicator has sunk into its oversold territory yet, so there is no rebound in store immediately for this important trend. The other trend, the long-term uptrend, in the investing environment motored on up, fairly oblivious to the immediate rise in selling pressure. Taken together these two trends still provide a mildly favorable investing environment for long stock positions.
However, the lift for long stocks from the investing environment is so mild as to leave stock prices immediately vulnerable to the trading environment trends. Early last week two near-term trend indicators climbed up from being oversold and a near-term uptrend tried to emerge. It fizzled after two days with these same indicators returning to their oversold zones in retreat. Unfortunately, as of today, all four indicators are in decline and will take several days to decline further before a new effort at a near-term rally will commence.
This leaves only the trade-term uptrend to give any hope to the bulls. Under the best of circumstances this trend is usually not strong enough to create a solid investing environment to propel stocks to new highs, although it can and does often act as a precursor to the near-term uptrend, when conditions are ripe. They are not at the moment. Trading volume is expected to be light and of the other three trends followed in this report, only one is headed north as discussed above, one has been neutralized and one is in retreat. There is no scheduled economic report due out today upon which investors might renew hope. Other issues that could affect buying forces and selling pressures are discussed below. Tomorrow will bring the first of several reports related to the housing market, which are not anticipated to generate optimism, and investors are bound to be wary all week as they await the next salvo regarding the continuing weakness in the labor market. It is hard to imagine an occurrence or event that could change this stagnant business picture dramatically. As noted above, even though they are hoarding large cash reserves, businesses are cautious about risking deploying capital into products and services that will struggle to find consumer acceptance in the marketplace. Not only is unemployment impacting adversely consumer sales, declining credit balances and increased savings are adding vexation to service and product sales, which constitute the lion's share of the GDP. The latest report on that matter is due out at the end of this week. If in fact various reports continue to disappoint for rational reasons, then it is also rational that businesses fear to take new investment risks and thus investors will view buying stocks as irrational. This string of interrelated concerns will reflect lower valuations for stocks until something happens to interrupt the logic chain reaction now ongoing. To examine the list of stocks changing trends in the last week, please go to http://www.mysmartrend.com.
Last week's impressive run of takeover bids commenced with BHP Billiton's (NYSE: BHP) $38.6 billion hostile nod to Potash (NYSE: POT), and was joined by several others, including Intel's (NASDAQ: INTC) $7.7 billion offer for McAfee (NYSE: MFE) and Rank Group's $4.6 billion proffer to Pactiv (NYSE: PTV). However, the normally bullish deal-making action failed to bolster investor sentiment sufficiently to offset fears of a double-dip recession or at best a slowing economic scenario and markets closed lower for the second straight week. Economic data, including a surprise jump in weekly jobless claims to 500K, their highest since last November, raised investors' level of fear about the sustainability of the US recovery, driving investors into safe-havens such as bonds.
This morning's investment landscape paints a similar picture of uncertainty, with offsetting corporate interim postings slowing to a trickle, and so unable to counter the week's numerous, important economic posts. Even so, corporate takeover activity remains in the limelight, with the Sunday Times reporting Campbell Soup (NYSE: CPB) considering a $2.3 billion break-up bid for United Biscuits, and SABMiller viewed as likely to spend as much as $10.9 billion to purchase Australian brewer Foster Group.
The prospects for sizeable investment upside potential from premium payments for deals normally enhance investor appetite for riskier asset plays. This morning, Hewlett-Packard (NYSE: HPQ) topped Dell's (NASDAQ: DELL) $18 per share bid for 3PAR (NYSE: PAR) with its own $24 offer, in a deal now valued at $1.6 billion. However, markets have shown themselves most concerned about the nature of a jobless US recovery, in which consumer sentiment is damaged by fears for job security, curtailing growth in the two-thirds of the US economy dependent upon consumer spending, and jeopardizing overall economic growth. Corporate takeovers most often offer economies of scale, permitting corporations to enhance their product offerings without job additions; indeed in most cases jobs are lost as companies merge their operations. Companies also appear reluctant to bolster employee ranks a great deal before determining the costs of government's recent health reform initiatives. In short, the normally volatile weekly claims data will remain in greater focus than usual this week, with investors assessing whether last week's 12K increase was an anomaly, or a signal for upcoming economic slowing and stock market declines.
Last week the DJIA shed 90 points, or 0.9%, to 10,214, for a 2.1% year-to-date decline. The S&P500, also down for the second week, dropped 0.7%, for a 3.9% decline on the year to 1072. The NASDAQ, however, managed a 0.3% increase on the week to finish at 2180; however, the index has fallen 3.9% so far this year. The Vix, "fear factor" index, dropped 2.9% on the week to end below the 26 level at 25.49, with economically-sensitive crude prices off 2.1% on the week to end at $73.82.
As risk sentiment diminished, safe-havens appreciated, with gold prices up 1% to $1228.80, 12.1% higher year-to-date. The US dollar increased 0.1% over the week against a basket of foreign currencies, now up 6.3% on the year, as the euro tumbled to a one-month low against the dollar on Friday, following Bundesbank president and ECB presidential candidate Weber's dovish comments suggesting monetary policy should remain accommodative until next year. Yields on 10- year US Treasuries fell for their fourth straight week, falling to 2.616% from 2.679%, at levels not seen since early 2009. This week's auction schedule includes a heavy, $109 billion overhang of notes and inflation-indexed securities. Of some note, according to the Investment Company Institute, investors have shunned riskier assets, during the first seven months of 2010, withdrawing $33.12 billion from US stock market mutual funds.
This week's economic data cover key regional manufacturing posts from the Chicago and Richmond Feds, new and existing home purchases, durable goods order activity, GDP revisions and word from Federal Reserve Chairman Bernanke from Jackson Hole. The list of companies reporting results has dried to an insignificant trickle. Firms reporting include Medtronic (NYSE: MDT) and Big Lots (NYSE: BIG) on Tuesday, JDS Uniphase (NASDAQ: JDSU) on Wednesday, Novell (NASDAQ: NOVL), and Patterson (NASDAQ: PDCO) on Thursday, and Tiffany (NYSE: TIF) on Friday.
Today's calendar includes the Chicago Fed's National Activity Index for July. Last week, regional posts showed the Philly Fed's survey had fallen to a thirteen-month low at negative 7.7 for August, versus estimates of Mid-Atlantic manufacturing activity growth to a positive 7.5. Earlier in the week the New York Fed had reported an increase to 7.10 from 5.08. The August Richmond Fed index is due out on Tuesday.
Among the week's most important data, existing home sales - due out Tuesday - are estimated to have plunged 13% to a 4.68 million pace, with new home sales - out on Wednesday - expected steady at 330K from a month earlier. Meanwhile, Wednesday's report on durable goods orders is estimated to show July orders for goods meant to last at least three years increased 3.1%, reversing June's 1.2% decline, and a 0.7% decline in May. Thursday's weekly claims data is expected to show a drop to 485K from last week's surprising, 500K level; continuing claims, however, are likely to have climbed to 4.515 million from 4.478 million previous. Friday's second estimate of second quarter GDP will also garner more than usual interest, after reports of increases to June trade deficit figures, with consensus estimates calling for a downward revision to 1.8% expansion, from the 2.4% estimated last month. The final read on University of Michigan's sentiment index for August is expected to post at 69.4, just shy the earlier reading of 69.6.
On Friday, Fed Chairman Bernanke's first address since the FOMC policy statement of August 10th rattled markets is scheduled. The FOMC statement had noted that "the pace of the economic recovery is likely to be more modest in the near-term than had been anticipated." Bernanke's address to central bankers at the Jackson Hole Symposium this Friday may shed more light on possible additional Fed moves to stimulate growth as well as more on the current outlook for the economy.
According to our analytics team, the proprietary SmarTrend(R) indicators retreated downward again in the face of increased selling pressure on Friday, and while the trade-term trend is likely to continue upward this morning, its lift is unlikely to prove sufficient to correct the losses of late last week. To examine the list of stocks changing trends in the last week, please visit http://www.mysmartrend.com.
In corporate news, China's Sinochem and Brazil-based Vale (NYSE: VALE) have reportedly contacted Potash's (NYSE: POT) board regarding initial inquiries about a potential merger, according to unnamed sources familiar with the matter.
Hewlett-Packard (NYSE: HPQ) announced it made a $24 per share cash bid for 3Par (NYSE: PAR), topping Dell's (NASDAQ: DELL) previous bid.
UK-based bank HSBC Holdings (NYSE: HBC) announced Monday that it was in talks with financial firm Old Mutual PLC to acquire a controlling stake in Nedbank Group Ltd., located in South Africa, in a deal that could be valued at as much as $6.8 billion.
Blackstone (NYSE: BX) landed a deal with Great Eagle, which is one of Hong Kong's largest property developers, to build high-end apartments in China.
Sanderson Farms (NASDAQ: SAFM) reported Q3 EPS of $1.55 per share, missing consensus estimates of $1.87 per share. Revenues fell 3.1% year-over-year to $489.1 million, short of consensus estimates of $518.6 million.
South Korea's National Pension Service said that it is looking to acquire a 23% stake in Colonial Pipeline Co. from Chevron Corp. (NYSE: CVX), according to a Financial Times report.
By Chip Brian, Editor-in-Chief, Comtex news Network
www.Comtex.com -- editor@mysmartrend.com
The following equities mentioned above include:
Comtex SmarTrend Alert
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Ticker Last Close Trend Direction Trend Price Trend Date
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INTC 18.91 Downtrend 19.44 8/11/2010
POT 149.67 Uptrend 94.07 7/13/2010
PAR 18.04 Uptrend 10.49 8/3/2010
BHP 67.44 Downtrend 70.38 8/17/2010
HPQ 39.85 Downtrend 43.14 8/9/2010
INX -- S&P 500: 1,072 Lo: 1,064 Hi: 1,076 Change: -3.94
http://www.mysmartrend.com/images/INX20100823.jpg
INDU -- DOW JONES: 10,214 Lo: 10,147 Hi: 10,271 Change: -57.59
http://www.mysmartrend.com/images/INDU20100823.jpg
QQQQ -- NASDAQ: 2,180 Lo: 2,160 Hi: 2,183 Change: +0.81
http://www.mysmartrend.com/images/QQQQ20100823.jpg
This report is divided into three sections. The first deals with our 5 proprietary market indicators, the second section examines important economic and business happenings which are expected to affect U.S. Stock market movements and the third section describes specific company announcement and earnings releases. Experience demonstrates that when these 5 indicators reach extremes they can shortly be expected to change direction and move in the opposite direction. When such happens in all or most of the 5 indicators, on or about the same time, followed by a move from below an extreme (oversold) to above that extreme (or vice versa for overbought), a change in market direction is very probable. The near term market moves are measured to identify the best possible returns for traders/investors. Daily price/volume examinations provide the best data upon which to base such forecasts. In this report though, intraday indicators are examined to improve the point of entry timing for the expected move.
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