Where the Volatility Came From

Stocks did a complete about-face in a late-day sell-off that had investors scratching their heads for explanation. From a high of 10,119 on the Dow, that index closed near the low of 9945, for a full-day swing of nearly 175 points. It was the most dramatic turnaround to the downside since, well, last October.

At issue is how the actual decline came about. Stocks had been drifting lower since making what would be the highs of the day around 10:45. But, at 3:15, things really got interesting, as the Dow quickly erased a 35 point gain and turned negative, extending those losses into the close with no escape mini-rally.

Some said that a sell recommendation by analyst Dick Bove on Wells Fargo, which had reported before the opening bell, caused it and all of the bank stocks to sell off. Others cited the Obama administration's directive to cut executive pay for financial firms which had accepted TARP funds - Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JP Morgan Chase, others - by as much as 90%, as the culprit. The most succinct explanation came from CNBC's Fast Money contributor Tim Seymour, founder and Managing Partner at Seygem Asset Management, who opined that program trading moved the market in such spectacular fashion. Calling them "the machines," Seymour reiterated his position that the move was technical and that the S&P would be on the rise on the morrow.

While it's plausible that the move was "machine-made," because the move was so sudden and on such high initial volume, it's not easy to accept Seymour's recipe for tomorrow's trade. We'll all know whether he was prescient within 16 hours. In any case, it was an ugly end to a few days of trading that has produced a mid-week loss overall. Today's full-trip stock move produced a double engulfing day, taking out the highs and lows of the previous two sessions, and was close to being a triple or quadruple engulfing move, as it nearly took out the lows of Friday and definitely engulfed all of Thursday's move from last week as well. That is not an encouraging sign for anyone who is long, which is just about everyone. The technicals are screaming sell, as the market also hit a double top today as well on both the Dow and the S&P, when it failed at S&P 1100.

Dow 9,949.36, -92.12 (0.92%)
NASDAQ 2,150.73, -12.74 (0.59%)
S&P 500 1,081.40, -9.66 (0.89%)
NYSE Composite 7,107.21, -51.06 (0.71%)

Simple indicators, all of which were positive most of the day, turned ugly in the final hour. Declining issues battered advancers, 4257-2207, and all sectors (not just the financials), except utilities were down. New highs beat new lows, 608-84, though mostly because of easy comparisons, so these figures have become nearly meaningless, except when taken in the proper context. If new lows expand considerably over the next few sessions, we'll have something then on which to chew. Until then, best ignore the highs-lows.

Volume was considerably higher than most recent sessions, another omen for the downside.

NYSE Volume 6,514,343,500
NASDAQ Volume 2,600,789,500

Another cause give for the decline was the high price of oil, now into the December contract, which gained $2.25, to $81.37 on the day, which many complain may be a price too high. Gold added $5.90, to $1,064.50, and silver gained 27 cents, to $17.83, very close to a 15-month high.

Markets are getting very jittery and investors appear to be losing patience with companies, as earnings reports are being scrutinized and tossed into the trash heap on the way to the sell button. Investors are also not very happy with the government's plans for everything from the general economy, to bank executive's salaries to health care reform. The discontent on Wall Street is nothing compared to the rabble-rousing in the streets, which is reaching fever pitch. Stocks may have to come down if only to appease the working man and woman in the US that Wall Street isn't running ahead of the pack and leaving Americans behind (it is).

Whatever the cause of today's collapse, it should not be taken lightly, if only for the reason that it is a technically-reversing pattern. If stocks suffer mildly tomorrow and Friday, it could be time to head for the exits for at least a few weeks. When the dust settles, stocks will be cheaper.

Dollar Strength, PPI Weigh Against Strong Earnings

Typically, during earnings reporting season (now), traders mostly ignore external economic details in favor of focusing on individual companies, but on Tuesday, the opposite occurred as FIVE Dow components posted better-than-expected earnings reports prior to the opening bell.

At 8:30 am, however, the monthly PPI figures were released, stunting what appeared to be a blossoming rally. September PPI figures showed a decline of 0.6%, indicating that pricing power in the production cycle was feeling a bit of a deflationary tinge. Stripping out food and energy, core PPI came in slightly negative, at 0.1%.

Why such a small change would influence the entire market, considering how much business done by US corporations is outside US borders, is something of a puzzle, and may not have had the overall effect of dampening down expectations as did the strength in the dollar, which gained against the Euro, Pound, Yen and other major currencies. The dollar index gained strength from 9:00 am until Noon EDT, precisely the time period in which stocks were suffering their worst declines.

While there is certainly a throng of economists who believe some dollar strength is healthy - and possibly essential - to America's long-term prospects as a world-leading economy, Wall Streeters apparently do not agree. The dollar and PPI data are the only cogent explanation for a decline in stocks on a day in which Pfizer (PFE), Caterpillar (CAT), United Technologies (UTX), DuPont (DD) and Coca-Cola (KO) all beat earnings estimates, but were mostly hammered by eager sellers. Of the five, only Caterpillar finished the session on positive ground.

Adding to the confusion was Apple's (AAPL) blowout quarter, which sent shares of the computer and personal hardware maker up nearly 5%, reaching a new 52-week high and all-time high for the stock.

So, maybe it wasn't the dollar or the PPI which sent stocks down all day on each of the major indices. Maybe the market is just a bit tired, and any little bit of bad news prompts enough potential sellers to pull the trigger. The market has been ablaze since March with hardly a hiccup. To take a small decline - even in the midst of hearty earnings - might be what's best for the overall health of the market. It's quite extended and some say over-extended, and due for a pull-back. What was witnessed today was about all the give-back that there is going to be, unless some titan company - say Cisco, McDonald's, Microsoft or Boeing - completely misses their numbers for the quarter.

This little foray into the dank downside concluded about as abruptly as possible when the Dow sank below 10,000 for two brief moments during the noon hour. The afternoon session was mostly sideways to up, ending closer to the highs of the day than the lows. Taking 50 points off the top of the Dow wasn't as much of a big deal as the S&P failing to break 1100 yesterday and sinking well below that level today. The late-day recovery leaves open the potential for a gap up above 1100 at the open, since it's only 9 points away and there is still a ton of money sitting on the sidelines.

What could trigger an opening rally are earnings reports from the likes of Freeport-McMoRan (FCX), Northern Trust (NTRS), Boeing (BA) or Wells-Fargo (WFC), all scheduled to report before the opening bell. The best bet would be a blowout quarter from FCX and Wells-Fargo combined, boosting two separate sectors (basic materials and financial) and offsetting the effects of Boeing, which is widely expected to show a large loss.

Dow 10,041.48, -50.71 (0.50%)
NASDAQ 2,163.47, -12.85 (0.59%)
S&P 500 1,091.06, -6.85 (0.62%)
NYSE Composite 7,158.27, -63.94 (0.89%)

On the day, simple indicators were in line with the poor overall showing, perhaps amplifying that with breadth. Losers beat gainers by a wide margin, 4487-1996, better than 2-1, while new highs beat new lows, 491-60, those results due primarily to easy year-ago comparisons, when stocks were mostly in free-fall. The paucity of new lows, even on a down day, is an encouraging sign for market bulls, however. Volume recovered significantly from yesterday's unusually-low level, back to standard.

NYSE Volume 6,047,379,500
NASDAQ Volume 2,136,783,250

Commodities felt the heat of a higher dollar, mostly trending lower. Oil lost 52 cents, to $79.09; gold was up 50 cents, to $1,058.60; silver lost 17 cents, to $17.56. It's become fairly clear from the commodity and forex markets that there isn't going to be any major economic disruptions any time soon. The dollar isn't going to fall over a cliff, oil isn't going back over $100, inflation isn't about to reappear any time soon, to the great chagrin of the horde of gold-bugs in the world (mostly detached from reality).

Sanity has been restored in the land of fiat-funny-money, at least for the time being. The apple cart will not be upturned and the rally will resumed in short order.

Well, just after I posted the above missive, Yahoo (YHOO) announced 3rd quarter earnings of 13 cents, blowing away estimates of .07. Can you say, Yip-yip-Yahoo!?

Market Gains on Low Volume

A quick overview of Monday's trading follows. More on Tuesday after the bell.

Awaiting the 3rd quarter earnings report from Apple (AAPL), investors were encouraged by the number of S&P companies which reported earnings better than estimates (78%) last week and further weakness in the dollar as the session unfolded.

Dow 10,092.19, +96.28 (0.96%)
NASDAQ 2,176.32, +19.52 (0.88%)
S&P 500 1,097.91, +10.23 (0.94%)
NYSE Composite 7,222.21, +88.25 (1.13%)

Advancing issues led losers, 4415-1889. There were 819 stocks making new 52-week highs, to 100 new lows. Volume was exceedingly low, signaling a large degree of caution at the very start of the biggest week of earnings reports. If the low volume pattern continues through the next few days, it could be indicative of a short-term market top. However, most companies have not yet reported, so not much can be read into one day's trading volume.

NYSE Volume 3,816,968,500
NASDAQ Volume 1,725,801,875

Oil reached a new high for the year, trading up $1.08, to $79.61. Gold advanced $7.90, to $1,066.00. Silver tacked on 21 cents, to close at $17.63 per ounce.

Besides Apple reporting after the close, five Dow components will report prior to Tuesday's opening bell. Caterpillar (CAT), Pfizer (PFE), United Technologies (UTX), Coca-Cola (KO) and DuPont (DD) are the companies reporting.

Friday's for Profit-Taking

Stocks finished lower on Friday, though up nicely for the week, as investors took a sour view of Bank of America's (BAC) poor 3rd quarter performance and punished Dow component IBM for missing revenue targets, even though the company beat EPS estimates.

The drop-off was dramatic right at the opening bell, with the major averages hitting their lows for the day within the first two hours of trading. Much of the action had to do with options expiration, and, sure enough, the afternoon session saw stocks gain strength, hitting their highs with about 20 minutes left in the session.

Though the major averages were down anywhere from 1-1.7% during the day, they finished at higher levels, keeping the stock market's winning week intact.

Dow 9,995.91, -67.03 (0.67%)
NASDAQ 2,156.80, -16.49 (0.76%)
S&P 500 1,087.68, -8.88 (0.81%)
NYSE Composite 7,133.96, -70.09 (0.97%)

Declining issued outpaced advancers, 4283-2136 (nearly 2-1), the widest disparity between losers and winners of the week. New highs remained better than new lows, 363-45. Volume was in line with the previous 3 days and most of the past few months. There was nothing surprising at all about the downturn. Stocks have been on a tear to the upside since March, and occasional pauses are expected and healthy. Investing is all about profits, and Fridays are usually good days on which to take them, as many obviously did.

NYSE Volume 5,708,362,000
NASDAQ Volume 2,237,903,750

Oil reached a new 2009 high, gaining 95 cents, to $78.53. Gold stopped its temporary slide, gaining 90 cents, to $1,051.50, and silver added a penny to its price, at $17.42. With oil taking the lead late this week, the price above $78 is signaling a potential top. There still is inadequate demand to command prices over $80, a level at which the market may balk. Those promoting an oil bull have not considered the overall implications of higher oil and gasoline prices on the global economy, nor have they taken into account the impact of alternative fuels, which continues to tamp down demand slightly, but with more force every day.

Commodities have had a nice run, but the potential for overpricing is evident. There's no rationale behind the move in gold and silver except for the prospect of inflation, which has yet to appear. Maybe nine months from now, or 18, but certainly, there is no inflation present in the economy anywhere. Stable prices should be considered a positive for recovery, though the supply-siders want and actually need inflation to verify their outlooks. Whether or not there will be further upside in commodities (read: dollar weakness) is uncertain and maybe even unlikely. The dollar may have already bottomed.

While the markets continue to grind higher, a couple of trends have developed. First, the chorus calling for a 10-15% correction continues to chirp, though their analysis fails to comprehend the enormity of the rally and the strength of the virtuous cycle which has developed. Despite some $3 trillion still sitting in money market funds and not being put to work in equities, those holding that sidelined money are hoping for the worst in earnings reports, the volume of which will increase dramatically over the upcoming two weeks.

Sadly, those waiting for an entry point may have had their best opportunity on Friday, as more than 3/2rd of companies reporting thus far have beaten estimates, and some, like Google, Intel and JP Morgan Chase, have beaten them by country miles. There will surely be weak hands and weak reports issued, but they're more than likely to be drowned out by the bullish drumbeat of companies which report better-than-expected earnings for the quarter.

That virtuous cycle, of investments making money, turning profits and investors moving from stock to stock and sector to sector keeps the indices churning higher. The pernicious cat-calls from those outside the Wall Street money machine, decrying everything from pure profits to executive compensation as evil, have just plain missed the boat and are likely drowning in debt.

The moans and screams from "Main Street" (which, incidentally, is holding its own) are mostly tied to the employment picture, which continues to flatten out, despite the largely anecdotal references cited by the doom-and-gloom crowd.Certain areas of the country are doing better than others, which is absolutely normal, as is the trend of certain industries now hiring while others continue to bleed jobs.

Eventually, jobs will find people, though the government, at all levels, continues to pamper job-losers with extended benefits, mortgage workouts and various other stimuli. Not surprisingly, state and local governments have had their hands out to the feds the longest, and still continue to run deficits, resist downsizing and tax reductions, even in the face of the next wave of job stress, right in their own wheelhouses.

Federal, state and local governments have weathered the financial crisis without shedding even a small percentage of what the private sector has endured, and as companies begin to hire (some already say they cannot fill jobs), expect these spendthrift government bodies to begin mass layoffs which should have occurred months ago. They are the reason the unemployment rate will remain high for some time. Even though the private sector will be thriving, the freeloading public employees will face cuts, layoffs and terminations in months ahead.

Meanwhile, stocks will continue higher until the really late and really stupid money enters the market, flooding the bourses with fresh cash as longer-term investors exit, producing a market top within the next 3-6 months and slamming the door on the rally in the short run. What to look for in the coming months, after earnings over the next two weeks (a period which will probably produce a small upside), is a series of smaller and smaller rallies, first in early November (followed by a lull through Thanksgiving into the first two weeks of December), a Santa Claus rally, a small Janaury run and then a serious lull in which everybody will be calling it a "stock picker's market" in which only the best companies will continue to rise.

Stocks will get a boost from 3rd quarter GDP, which is expected to show the first quarterly growth in a year, and, surprisingly, from October and November jobs data. There is a high degree of probability that September's poor employment picture was more of an aberration than a trend-starter.

The next two weeks seem almost certain to produce profits in many stocks, even though trading may be choppy and jittery. The wall of worry that the markets must climb gets even more worrisome near the top, and we are getting close to nose-bleed territory. Before the year is out, however, expect the Dow to close in on 10,750-11,000 and the S&P 500 to reach for 1200.

Late Day Action Boosts Stocks; Google Soars; IBM Sours

As is often the case during earnings season, much of the real action happened after the closing bell. That was when tech bellwethers Google (GOOG) and IBM (IBM) announced third quarter earnings results. But first, a recap of the day's trading, which was, by most accounts, choppy and surprising at the end.

Stocks spent most of the day in a narrow range just below the break even line. Around 2:30 pm, the major indices managed to pop into the green and stayed there into the close, marking new 2009 highs for the major indices. These moves were in spite of the chorus of boos surrounding Goldman Sach's 3rd quarter earnings announcement before the bell, which was better than expectations, but not good enough to keep the stock from sliding throughout the session. Most of the interest was focused not on Goldman's stellar 3rd quarter, but on the bonuses being paid to executives.

The company practically owns the deal-making space, now that Bear Stearns and Lehman Bros. have departed, and they made boatloads of money - $3.19 billion, beating the estimates handily - but because of a Meredith Whitney downgrade on Tuesday (based on valuation - Goldman shares have nearly quadrupled since last November) and general dislike for the firm many believe runs the government, the banking business and most of the known universe. Like them or hate them, making 300% on your money in a year isn't hard to take. Sure, they pay their executives handsomely, but they bring in huge money for their shareholders, so the only people griping are those not smart enough to have gotten on the bandwagon.

The stock lost a whole 3 points and change on the day. I'm sure owners of the stock are really crying in their champagne.

Also before the bell was the usual horrid unemployment claims number. Another 514,000 Americans filed for unemployment benefits this week. These numbers cannot be taken seriously. First, unemployment benefits are so easy to come by these days that the people claiming them probably shouldn't even be counted as seriously unemployed. All you have to do is a poor job and somebody will certainly furlough you. Additionally, according to the figures, which have been over 500,000 for more than a year, there have been at least 25 million people collecting benefits in the past 12 months. That's an enormous figure, even in bad times. What matters more is how long these people stay out of work, not how many are stepping up to the collection plate.

The number of people still collecting benefits fell below 6 million, and that number has been trending lower for months, a positive sign for the economy.

Citigroup also reported before the bell and the results were mixed. The company which received the most assistance from the feds, and is partially owned by you ,me, and our neighbors across America, hasn't done a very good job of managing our money, which came as no surprise and had little influence on the general market.

Dow 10,062.94, +47.08 (0.47%)
NASDAQ 2,173.29, +1.06 (0.05%)
S&P 500 1,096.56, +4.54 (0.42%)
NYSE Composite 7,204.05. +21.67 (0.30%)

Declining issues finished slightly ahead of advancers, 3338-3081. There were 727 new highs to just 73 new lows. Volume was in the range it's been since Tuesday. There is still a ton of money on the sidelines, missing out on the rally. This stagnant money will be great for savvy traders, because when it finally does come in, it will send a strong selling signal at a supposed market top. Smart guys and gals will be able to maximize profits upon exiting. Look for an unusually high volume number to send the signal that it's time to unload.

NYSE Volume 6,184,697,500
NASDAQ Volume 2,199,385,750

Commodities were led by oil, which gained $2.40, to $77.58. The price of oil, and its derivative, gas, is approaching a level at which it can damage the economic recovery. more money being spent on fuel means less to spend on all the other things Americans enjoy. Though there's unanimity in the chorus of oil traders that the price will go higher, I'd still not engage in that trade as it can only go so far before crimping its own demand. Many would agree that it's already too high, but, since all hatred is currently focused on bankers, the oil moguls are getting a free ride. Buy some Chevron or ExxonMobil stock if you don't like the higher prices for gas. The gains will even out, and if prices do fall, your stock will only be worth a little less. It's a zero sum trade if you play it properly.

The precious metals were hit by profit taking. Gold sold off to $1,050.60, a key inflection point, down by $14.10. Silver dipped 49 cents, to $17.42.

As for Google, the company posted its largest profit and revenue ever. That about covers the state of the internet. Technology companies are extremely healthy, with squeaky clean balance sheets. Like Google, most of the larger ones have no, or very small amounts of, debt.

IBM also beat forecasts, but revenue slipped. Big Blue is still recovering from the last year in which many of its major clients suffered or went out of business. They're doing just fine, however, having hit new 52-week highs in just the past week.

Google also posted a string of new 52-week highs in recent days. The search giant is branching out into other areas, a sign that they feel supremely confident about the economy going forward.

You should too.