Market Wrap, Wednesday, 04/22/2009 Corporate Earnings Causing Volatility by Robert Ogilvie Click here to email Robert

HAVING TROUBLE PRINTING?

Today was the second day in a row where the markets opened lower and then rallied from those lows to post strong intra day gains. However, today’s highs met resistance at 861, 8044, and 1363 on the S&P 500, the Dow Jones Industrial Average, and the Nasdaq 100 (NDX), respectively. Much of the early weakness can be attributed to the earnings report that came from Morgan Stanley (MS). MS reported that they were cutting their dividend $0.05 per share and a larger than expected loss of $0.57 per share versus the consensus estimate of $0.08. Usually I would cover the earnings in that section of the newsletter, but the market’s moves are mostly attributed to the earnings releases. Other negative reports came from Capital One (COF) and Boeing (BA). McDonalds beat their estimate by $0.01 and declined $1.28 to $54.25 likely due to the company announcing that their revenues had declined 9.6% year over year.

Next on deck was from Wells Fargo (WFC). They reported first quarter earnings of $0.56 or a penny above their pre-announced earnings. The EPS results are after merger-related and restructuring expenses. A spokesperson for the company said "First quarter results, including a record pre-tax pre-provision profit of $9.2 billion, were largely driven by growth in many of our diversified businesses and the new contribution to growth now coming from Wachovia. Results also reflected lower net charge-offs partly because Wachovia's higher-risk loan portfolios already were written down at December 31, 2008, leaving the remainder of Wachovia's loan portfolios with naturally lower loss content... Our net interest margin of 4.16% was the highest among our large bank peers. We again had above-peer growth in deposits. Wachovia spent most of the day in the green with a high at $20.56 but failed to hold those gains and thus closed down $0.28 to $18.14. The late day weakness came from selling pressure in the financial sector and primarily the regional banks. The financials lost 3.8% by the close which was greater than the rest of the S&P sectors.

After the bell, Apple (AAPL) reported earnings of $1.33 per share that beat the estimates by $0.24. Revenues rose 8.7% year over year to $8.16 billion versus the $7.96 billion consensus. However, AAPL issued downside guidance for the third quarter and sees EPS of $0.95 to $1.00 versus the $1.12 consensus. Apple reports Q2 iPhones sales of 3.79 million versus Street expectation for 3.5 million. Apple reports Q2 Mac sales of 2.22 million versus Street expectation for 2.2 million. Co said, "We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history... Apple's financial condition remains very robust, with almost $29 billion in cash and marketable securities on our balance sheet." AAPL shares are trading at $124.87, up from the $121.51 regular session close that was actually down $0.25.

The NYSE, otherwise referred to as the Big Board, lost 48.98 points or 0.92% on 1.77 billion shares. The day’s volume exceeds yesterdays and the 50 day average volume of 1.65 billion shares. Since the advance/decline ratio is nearly one to one, today can’t be marked as a distribution day. There were actually more advancers (1,552) than declining (1,396) stocks today even though the index closed lower. The amount of New 52 Week Lows (60) far outpaced the new highs (13). The NASDAQ Composite closed 2.27 higher after posting a 36 point gain earlier. Volume on the Comp was 2.66 billion which came in greater that yesterday’s and the 50 day average of 2.27 billion. There were 1,437 advancing issues versus 1,308 declining issues. The NASDAQ seems to be showing more internal strength than the NYSE. For instance, the number of new highs and new lows on the Comp is fairly flat from day to day while the NYSE still has some sectors that are finding resistance and can’t seem to join the rally. Stocks trading up with increasing volume exceed those down as indicated by the $TRIN/Q.

Taking a break from earnings, let’s look at what the next two days has in store for us with the Economic reports. Tomorrow morning, amidst all of the earnings release the government will report the Initial Unemployment Claims for the week ending April 18th. Following the open, Existing Home Sales are due to be reported and are expected to decline from the prior reports readings of an annual adjusted rate of 4.72 million homes. Since the housing market is the major source of the pain this country is in, reports on anything to do with housing will likely be influential to the directional bias following the 10:00 AM Eastern Time report. I will let my colleague Keene preview the Friday reports tomorrow.

As you can see from the image above there are a lot of earnings die to report tomorrow. Actually, there are a lot more than depicted above because I didn’t have enough room to list them all. However, per usual I determined the stocks that I thought most of you might care to know were scheduled to report earnings tomorrow. Microsoft is due to report after the close. UPS reports in the morning. Usually NYSE listed stocks report in the morning while NASDAQ listed stocks report after the close. Good luck with the added actual volatility. Remember that one reason your long options lost money even though you picked the correct direction following earnings is that volatility is bid up preannouncement and then decreases following the event.

Per usual we will start with a discussion on the broad market (i.e. the S&P 500 – SPX). I prefer the S&P 500 (SPX) because it represents nine sectors with 500 stocks, however unevenly, while the Dow Jones Industrial Average (INDU) only has 30 stocks to represent the market. Both are flawed and roughly represent the primary economic sectors. The chart above shows three major simple moving averages: the 50 (blue), 89 (purple) and the 200 (grey). Many institutional money managers primarily track these as an indication of longer term trends. Most managers are long biased and prefer to invest in a company’s fundamental story and thus have a long term time horizon. Since the 200 day moving average is still declining, some managers prefer to wait until the market moves above this level or it begins to move upward. That means they are waiting for you to buy the market up and make the environment more suitable before they risk capital. However, it should be noted that many managers begin to establish positions above and reduce positions below the 50 day moving average. The 89 day moving average basically serves as a rest stop between the two destinations. 89 days is about the number of days in a quarter. As I mentioned on Monday, the 89 day moving average is coincidentally near the 23% Fibonacci retracement. I suggested that there was a good possibility for the SPX to test the Fibonacci level and then bounce. Had it not bounced and held, at least for two day so far, the next target is at the 50 day average which sits just below the 38% Fibonacci retracement level at $795. The chart depicts the 50 day average is a little lower at $790. Following this afternoons late day weakness that resulted from a tired sector selling off, the tendency is for the SPX to decline to the 38% retracement and then bounce higher up to the 200 day moving average some time mid May. If I get this right, maybe CNBC will have me on to discuss how smart I am. I am just having fun here. I don’t want to share past those of you that read these daily wraps.

In Monday’s wrap, I covered the simple moving average strategy that sets the bias according the where the shorter term 8 bar exponential moving average (EMA) is in relation to the 21 bat EMA. Long bias occurs when the 8 bar EMA is above the 21 bar EMA while short bias is set when the 8 bar EMA is below the 21 bar EMA. Long trades are placed on the first test of the 21 day EMA and then scaled out at overbought indications and closes below the 8 bar EMA. Last Friday we had an overbought scenario that would require us to scale out of part of the position. Tuesday morning’s test of the 21 day EMA would have us re-enter and create a full position. Today’s close below the 8 bar EMA would require us to close out part of the long biased position. While this isn’t a strategy meant for everyone, I review it each time as a way to keep honest and consistent. The rules are predetermined and easy to follow. Your strategy may follow similar rules or a completely different methodology. One thing is constant, trading by some rules is the key to consistency. If you are consistently losing money while following the same rules, you know that the variables are wrong and not your emotions,

Referring to the chart above, the close below the 8 day EMA suggests weakness in the SPX may follow soon. The lower high established today followed by the close down shows a lack of conviction at these levels. A close below the 21 day EMA may place the SPX down to the lower Bollinger band (788.63) which is consequently at the 50 day simple moving average. The Slow Stochastic has continued to show declining momentum while the RSI is slower to confirm. Monday had a lower close on the RSI which indicates negative divergence. We still need the 813 gap to be filled.

The NASDAQ 100 (NDX) filled in the upside gap established from Monday’s down open in today’s session. The NDX closed up only 6.66 after posting a 33 point advance. Much of the intra day strength was attributed to AAPL and EBAY earnings that reported after the close. Enough about the earnings that were, onto the indications of the chart below. As with the SPX chart, Slow Stochastics are declining toward oversold territory without the market. Some might see this as a positive indication since the market is consolidating while the oscillators are approaching an oversold indication. The RSI, however, has yet to confirm any market direction. It did post a lower close on Monday which may indicate negative divergence. Negative divergence may provide prior insight into the direction to come. There is still a gap at 1251 that needs to be filled in. It is 85 points away or two bad days away. Earnings have been good in the technology sector, so I don’t know if the gap will be filled any time soon. The NDX is still on an uptrend. The 8 day EMA is flattening out and narrowing its spread between it and the 21 day EMA. So maybe the momentum is subsiding on the tech sector. Have a nice weekend and remember to use stops.