— “Calling the Trend” Column, by George Leong, B. CommThe DOW closed above 10,000 on Wednesday for the first time since October 8, 2008. Leadership from the banks and technology helped to drive stock markets in what was a frenzy-like day for stocks.
The markets continue to trade at recent highs. At this point, about 92% of all U.S. stocks are above the 200-day moving average, up from 91% a week earlier and in line with 92% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher
Earnings optimism is driving stocks. Intel Corporation (NASDAQ/INTC) delivered an excellent third quarter on both a year-over-year and a sequential basis. Revenues of $9.4 billion and earnings of $0.33 per diluted share were well above Street estimates. The gross margin was impressive at 58% and estimates call for it to rise to 64% in the fourth quarter.
In the banking sector, JPMorgan Chase & Co. (NYSE/JPM) blew away estimates, and is driving buying. Yet there remain massive debt and liabilities on the balance sheet, which could impact future operations.
The rise from the March low has been nothing but impressive. With the DOW finally breaking back above 10,000, where do we go from here? The index remains down 30% from its high. Over the next several weeks, watch to see if the markets rally from here or stall.
We are mixed on the near term. Markets are at a pivot point. My view is that 10,000 is important psychologically, but for the rally to continue, earnings and economic data will need to be positive. Breadth and sentiment are positive, but trading volume is somewhat light, which is not what we want to see in an up market. Earnings need to continue to be strong.
Retail sales for September remained weak, as expected. The key shopping season is nearing, and will be important going forward.
Gold prices continue to surge above $1,000 an ounce, largely driven by the weakening U.S. dollar. The near-term technical signals are bullish, but overbought. The trend is positive and, as long as this holds, gold could be heading higher towards $1,100. Yet be careful. If you hold some gold stocks, take some profits off the table.
The CRB Spot Index, a measure of 22 commodities, remains strong at around 270. The near-term technical signals are bullish, but overbought. The CRB is indicating that the global economies are setting up for a turnaround, as the basket of key commodities is showing some signs of turning up. The peak for the CRB was June 1, 2008, when the index traded at 467.60 prior to the subsequent slide. The low was at the 180 level in late 2001.
At this point, you should continue to watch earnings as they pick up over the next few weeks. Watch the guidance going forward. Companies have a better idea of demand, as they are in the marketplace.
There is plenty of cash on the sidelines that has yet come into the market. Those that missed the rally are now thinking about joining, but I advise prudence. Watch how markets trade in the near term and take some profits. You may also want to hedge the downside risk by buying put options on large stock positions or puts on indices.