After A 5-Day 7% Rally – The Market Is Tired – Earnings Have Been Good!

July 17, 2009

This has been a wild week. The market has gone from a technical breakdown to a 7% rally in a matter of days. I believe the path was paved last week when bond auctions fared much better than expected.

Blockbuster earnings from Goldman Sachs sparked a huge rally in financial stocks and the market pushed through resistance. Tuesday, Intel followed up with fantastic earnings of its own and the entire tech sector lifted off.

Yesterday, traders were taking a breather after two huge run-ups. However, late in the day buyers resurfaced. They bought stocks right into the closing bell ahead of earnings from Google and IBM. Both companies handily beat expectations. Google is trading lower on revenue concerns. IBM fared much better and it is adding to after-hours gains today. Normally, huge “beats” like this would spark an enormous rally. The fact that the stocks are not moving higher tells me that they might have run out of gas.

Financial stocks look tired. Yesterday morning, J.P. Morgan Chase posted great results and the stock was flat.

This morning, GE, Bank of America and Citigroup announced earnings. General Electric beat earnings estimates but revenues fell 17%. Bank of America also beat earnings estimates but it warned of a surge in credit card, mortgage and business loan defaults. Citigroup beat estimates, but most of its gains came from the sale of Smith Barney. Credit costs increased 50% and they added $4 billion to loan loss reserves. Keep in mind that Citigroup still has $350 billion tied up in toxic assets.

This morning, housing starts rose 3.6% and that is a positive sign. Mind you, they are rising from a very low level.

Next week, Treasury bond auctions are light and that will not hinder this rally. Economic news is also light and there are only a few minor releases.

Earnings will be the highlight and each day is filled with major announcements. Analysts are looking for a 39% decline in quarterly earnings and companies have been able to blow those numbers out of the water in the early going. However, great news is already priced in and stocks are not rallying after the news.

The market is within striking distance of the June high and good earnings could push it through that resistance level. If this happens, the next leg of the rally will begin.

It’s hard to tell how much of the rally this week was due to good earnings and how much of it was short covering. Without question bears have had their head handed to them. Asset Managers that are under allocated will be forced to put money to work.

In this light summer trading, I am keeping my positions very small. Traders are looking for direction and these wild, unpredictable swings can do a great deal of damage. I still like commodity stocks and I feel that any recovery will start with an increase in oil demand. If you believe we are coming out of the recession, buy energy stocks. In particular I like oil services since their revenues and earnings have been very consistent.
Most of the expiration fireworks have passed and I expect a quiet day. The market needs to rest after a massive five day 7% rally. If earnings continue to surprise, we could challenge the highs from June next week.
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