Tuesday, April 17, 2007

Dow Closes in on Record as NASDAQ Slips

The bidding was frantic on the NYSE, especially on Dow components Johnson & Johnson (JNJ) and Coke (KO) as both companies reported solid earnings for the 1st quarter of '06. Volume on both stocks was nearly triple their average and their contribution to the Dow's gain was obvious, as the other indices were close to the flat line.

Dow 12,773.04 +52.58; NASDAQ 2,516.95 -1.38; S&P 500 1,471.48 +3.01; NYSE Composite 9,631.39 +6.16

Whether the Dow stocks can continue their momentum is open for debate. Solid earnings are providing buying interest, but it seems short-lived. Take for instance, Merck (MRK), which popped nearly 4 points on Friday, but has seemingly run out of steam. It fell 31 cents today. Likewise, Citigroup (C), jumped nearly 1 1/2 points on Monday, but Tuesday saw it end down 40 cents.

The jury is still out on the overall health of the economy, and, particularly, the corporate end of it. The Dow stocks are still safe havens, though the returns are not quite the stuff of dreams, nor are the dividends they spin off, ranging between 2 and 4 percent, hardly keeping pace with inflation.

After the markets closed, IBM reported earnings in line with analyst estimates. The company said it made 1.21 per share, ahead of last years' 1Q 1.08 per share. IBM's picture has been cloudy, though it was one of the top performers during the 2nd half of 2006, in which it ran from the mid 70s to the high 90s, a better-than 30% move.

The computer and technology giant may be somewhat of a proxy for the Dow looking ahead. IBM sees earnings growth of 10-11% for the remainder of 2007. That's OK for a mature companies like Big Blue, but the market will want more.

Peeking under the hood, we see that the trade on Tuesday was not suggestive of further upward momentum. Declining issues actually held a nearly 5-4 edge over advancing ones, though new highs once again popped over 500, at 522, with only 62 issues hitting new lows. That ratio is about as strong as you'll ever see, with close to 8% of all issues trading at new highs. Pretty remarkable, that.

The question is sustainability, though as long as investors can take the continuing slide of the dollar in stride or completely ignore it, this market looks like it's ready to pop to another couple of hundred points. The dollar hit a benchmark against the Pound Sterling today, falling to a value equal to $2 per British Pound, a level last seen in 1992. That's good news for Brits, in a sense, in that their economy was inflating to the point that they're about to raise interest rates. Of course, their American counterparts aren't so circumspect, content to believe that "core" inflation of 2.5% (excluding food and energy - the two elements upon which the entire economy depends) is just fine and dandy.

On that note, the Fed may have some input on May 9, but not any time sooner. Should Bernanke and friends decide to hike rates even a smidgen, the stock markets will tank like so much dead weight. We'll reserve judgment until then.

Oil traders delivered some welcome news, selling off a barrel for 51 cents less than a day ago, closing at $63.10. Gold took some profit taking, dropping $2.00 to $692.50, but still close to 1-year highs. The same for silver, which lost just 6 cents to remain slightly above the $14 mark at $14.02. Both of the precious metals are signaling potential breakouts.

No comments: