Midday Comment - October 19, 2010
The U.S stock market gapped down sharply at the opening bell today, and has been gradually paring its losses. The tone to the session is still quite negative with declining issues beating out advancers by better than 2-to1 on the NYSE and NASDAQ markets. The basic materials sector is leading the market lower today. In addition to weakness in base metals, some gold issues are also declining today. Newmont Mining (NEM) and Barrick Gold (ABX) are both off sharply. The energy sector is also lagging, driven lower by Weatherford (WFT). However, bucking the trend within the energy group are some coal stocks, such as Massey Energy (MEE) and Peabody (BTU). The technology sector is also a loser today, with Apple (AAPL) trading lower. The company posted strong earnings, bur traders have taken profits. Some investors apparently cited weaker-than-hoped for sales of iPads as a source of disappointment. Meanwhile, IBM (IBM – Free Analyst Report) also reported rising earnings for the quarter, but some analysts took issue with the performance of some segments.
In contrast, there are some issues showing some strength. The banks, such as Citi (C), Bank of America (BAC – Free Analyst Report), JP Morgan Chase (JPM – Free Analyst Report), and Wells Fargo (WFC) are all trading up today, bucking the downtrend. Bank of America posted a quarterly loss, but its operating profit was better than expected. Yesterday, Citi posted better-than-expected quarterly profits, as well. The rise in bank issues today, comes after the sector had gotten battered on fears last week of a possible foreclosure debacle.
There has been some news on the macroeconomic front that may be pressuring the stock market today. In a surprise move, the People’s Bank of China has raised its interest rate slightly. The move has some traders concerned that the economy in that region will cool, as a result, leading to less demand for basic materials, such as metals and oil. No doubt this is partly behind the drop in these sectors today. Another factors weighing on the market is the appreciation of the U.S. dollar. The U.S. has been under growing pressure to stabilize the dollar by the World Bank and other emerging countries. World currency issues will no doubt be discussed at the upcoming G20 meetings slated to take place in South Korea. In addition to short covering, the rising dollar may have some traders concerned that the Fed’s quantitative easing policy may be less aggressive than was previously expected. The stock market had been rallying lately on hopes that a loose monetary policy would somehow provide the needed liquidity for a sustained business recovery.
The U.S stock market has had a dramatic run over the past few weeks, and no doubt some traders will be taking profits through the earnings season. Many of the Dow components have already reported their figures. So far it does not look too bad. If the economic news starts to catch up with corporate profits, the market may be able to maintain the current level, if not consolidate and move higher.