Revisiting Dow Theory As Industirals Reach '09 High

The midsummer rally caught fire on Thursday, as investors were encouraged by strong results from a wide range of companies, including Ford Motor Company (F), which announced better-than-expected earnings for the second quarter.

Also buoying the buyers was the third straight month of higher existing home sales, as reported by the National Association of Realtors (NAR). Not only were there more homes sold in June than in the previous month, but the number of foreclosure sales and short sales were of a smaller percentage than had been previously seen. The trade association also reported that the existing supply of homes for sale had fallen to just over 9 months.

3M (MMM) beat expectations, McDonald's (MCD) and American Express (AXP) missed. Amazon (AMZN), the world's largest online retailer, saw higher sales volume for the quarter but lower earnings, reporting 32 cents per share on $4.65 billion in sales. The stock was higher during regular trading hours, but had taken a $6.5% hit after hours.

Also after the close, Capital One (COF), a major credit card issuer, posted a $275.5 million loss as delinquencies continued to wrack the company's profits. They lost 65 cents per share in the quarter compared with a profit of $1.21 per share in the same period a year ago.

Another significant company reporting after the bell was Microsoft (MSFT), which missed both sales and earnings targets by wide margins. The global software, gaming and internet giant is being affected not only by the downturn in the economy, but by hardball competition from the likes of Google.

However, most of the trading day was cheery, with the Dow Jones Industrials exceeding its previous high from January 2nd, an initial sign of a possible new bull market emerging. However, the transportation index (DJT) failed to confirm, closing at 3506.12, far below the January 6 high of 3717.26. The mixed results after the bell, juxtaposed with the Dow's closing high and non-confirmation, sets up an interesting close for the week on Friday. As opposed to the nearly 300 companies which reported on Thursday, Friday will pale by comparison, with fewer than 80 companies scheduled to release earnings, none of them major firms.

Dow 9,069.29, +188.03 (2.12%)
NASDAQ 1,973.60, +47.22 (2.45%)
S&P 500 976.29, +22.22 (2.33%)
NYSE Composite 6,302.52, +151.12 (2.46%)

The good news is that the NASDAQ rally has now reached 12 straight sessions, and the majority of companies reporting are turning profits and many are beating expectations. On the day, advancing issues trampled decliners, 5206-1305 and new highs catapulted past new lows, 272-112. The number of new highs for the day was the most in nearly 2 years, a remarkable number. Volume also offered an encouraging signal, with a massive number of shares traded on the NASDAQ and a solid showing for the NYSE as well.

NYSE Volume 1,396,542,000
NASDAQ Volume 3,083,885,000

Commodities responded with mostly higher futures prices, especially oil, which gained $1.76, to $67.16. Gold was up another $1.50, to $954.80, while silver continued to rally off recent lows, up 7 cents, to $13.77.

While the economy may still be a little wobbly, the worst may indeed be behind us. However, investors are still skittish over stocks following last year's October surprise, the worst spate of stock selling since the Great Depression. Whether or not the transportation index will confirm a new bull market remains a distant outlook and how far investors will stretch their gains through the earnings season will also bear close attention.