Thursday, July 22, 2010

Stocks Explode to Upside on Earnings

Well, apparently whatever it was that Ben Bernanke said on Wednesday to the Senate Committee, spooking the markets into an immediate and swift pullback, was not all that important because prior to the opening bell three Dow components - 3M (MMM), AT&T (T) and Caterpillar (CAT) - released second quarter earnings above expectations and sent stocks off to a roaring start.

The enthusiasm for equities was not in the least tempered by higher initial unemployment claims, which came in at 464,000, well ahead of last week's 427,000. So long as companies were turning sizable profits, nothing was holding back investors from buying.

Even existing home sales being down 5.1% for June or the Index of Leading Indicators dipping 0.2% had no effect on the rush to buy into the good news from corporate earnings.

Dow 10,322.30, +201.77 (1.99%)
NASDAQ 2,245.89, +58.56 (2.68%)
S&P 500 1,093.67, +24.08 (2.25%)
NYSE Composite 6,901.91, +170.75 (2.54%)

Advancing issues reversed Wednesday's drubbing, leading decliners, 5498-1017, and new highs soared ahead of new lows, 278-82. On a day which held such unbridled enthusiasm, there were more new highs (46) on the NASDAQ than new highs (39), reversing a three-day counter-trend. Volume was roughly at the same level as the previous session, though for bulls, it was a positive sign.

NASDAQ Volume 2,264,130,750
NYSE Volume 5,504,649,500

Oil futures were really the big winner on the day, with the September contract rising $2.74, to $79.30, the basis for which was unknown. Gold and silver were ahead only slightly, with gold gaining $3.90, to $1,195.50, and silver up 32 cents, to $18.12.

Every sector showed positive results as earnings season finally produced some results on which traders could trust with their money.

Despite the high quality of earnings, the major indices have yet to break through their 200-day moving averages, which are providing fairly stiff resistance, though corporate earnings continue to defy economic indicators.

At some point, possibly as early as tomorrow, stocks should break out from their recent range, tossing aside the cockeyed government reports and focusing on profits and valuations, like today.

Anecdotally, valuations may be as rich as they may get. For instance, 3M, which reported earnings of $1.54 for the most recent quarter, is trading at a multiple of 16.5 times trailing earnings, fairly rich.

AT&T is trading at 11.5 times earnings, while Caterpillar sports an ultra-rich multiple of 25.75 times earnings.

Traditionally, stocks trade in a range of 12-15 times earnings. Considering the headwinds into which companies are running, the low end of that range may be more appropriate at the present. That kind of metric is keeping a lid on stocks currently.

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