Good day! Although volume remained modest compared to the past several weeks, Friday's session was a slow one for participants expecting strong earnings moves. The market teetered between positive and negative territory throughout the first half of the session on Friday, but after the European markets closed the results of stress tests on 91 banks by the European Central Bank revealed that all of the major banks would be able to survive further economic downturn over the next two years, although 7 would need to raise funds. 5 of the 7 were Spanish banks. The tests were met with skepticism, but similar tests in the United States have shown promise in terms of their accuracy.
Dow Jones Industrial Average
The U.S. markets turned positive following the stress test results, but appeared to take the news with a grain of salt. The intraday action was a bit more difficult than the remainder of the week had been to trade, but the indices broke higher out of a choppy morning trading range after it was revealed at about 13:00 ET that French drugmaker Sanofi-Aventis informally approached Genzyme Corp. (GENZ) for acquisition.
The indices jumped higher out of the 15 minute trading range following the GENZ news, but it failed to maintain the breakout trend. By 13:30 ET the indices were hitting initial resistance with a retest of the previous week's highs in the Dow and S&P 500. The remainder of the session was once again struck by a light volume trading range.
The Dow Jones Industrial Average ($DJI) ended the session at 10,424.62 with a gain of 102.32 points, or 0.99%. 25 of the Dow's 30 index components posted a gain on Friday. The top performers were Verizon (VZ) with a gain of 3.78% following earnings, American Express (AXP) with a gain of 3.70% on earnings, General Electric (GE) with a gain of 3.29%, and Alcoa (AA) with a gain of 2.13%. GE landed on the winner's list after it announced a dividend rate hike of 20% in addition to restarting its share buyback program at the end of the quarter. The biggest losers were McDonalds (MCD) (-2.10%) following earnings, Pfizer (PFE) (-1.55%), and Merck (MRK) (-0.88%).
The Dow ended the week higher by 326.72 points, or 3.24%, making it the second-largest weekly gain of the year. It is up 6.7% month-to-date, which would be its largest monthly percentage increase since July 2009 if it holds. The strongest stock in the Dow over the past week was Boeing (BA) (+3.2%), while Johnson & Johnson (JNJ) was the weakest.
The S&P 500 ($SPX) rose 8.99 points, or 0.82%, and closed at 1,102.66. The industrial and material sectors were the S&P's leaders on Friday. Genzyme Corp. (GENZ) was the S&P 500's top performing stock on Friday. It ended the session higher by 15.41%. Devry Inc. (DVY) followed with a gain of 15.10%. E*Trade (ETFC) rose 7.57% and Murphy Oil (MUR) climbed 6.52%. QLogic (QLGC) was the biggest loser, falling 16.39%, while Federated Invs. (FII) fell 4.85%. Biogen (BIIB), which was considered another potential takeover candidate by Sanofi, shed 4.81% on the GENZ acquisition news.
The S&P 500 ended the week higher by 37.78 points, or 3.55%. 89% of the index components finished the week higher. It is also on track for its largest monthly percentage increase since last July when it climbed 7.4%.
175 of the S&P 500's companies have reported earnings to far. 78% topped analysts' expectations, while 10% were in line, and 12% missed. Since Thomson Reuters began tracking earnings estimates in 1994, the highest percentage of companies that reported earnings which beat estimates was 79%. This took place in 2009 in the third quarter.
The Nasdaq Composite ($COMPX) ended the session higher by 23.58 points, or 1.05%, and it closed at 2,269.47. Apollo (APOL) (+6.37%) and Intuitive Surgical (ISRG) followed GENZ on the gainers' list for the Nasdaq-100 on Friday. Teva Pharmaceutical (TEVA) was its weakest component, followed by BIIB and Flextronics Intl. (FLEX) (-4.73%).
The Nasdaq Composite ended the week higher by 90.42 points, or 4.2%, which is the second time it managed a 4% or larger gain so far this year. It is up 7.6% month-to-date. Last July is rose 7.82%.
Although the market only corrected for a week from the rally off July's opening lows, the Nasdaq has already pushed last the previous July highs and the Dow and S&P are threatening more solid attempts to do the same. This may seem favorable at first glance for the bulls, but it actually increases their risk on breakaway strategies. The rally off the July lows into the 50 day moving averages took about 2 weeks. An ideal correction would take 3-4 weeks. If the indices do not pull back into the range on Monday and push to new highs, the pattern would often serve as a trap for the bulls. The 100 day sma in the indices will become the next major resistance on the daily time frames. This is about 10,525 in the Dow. A slower momentum move into that level as compared to the early-July rally can easy be followed by more rapid downside. Keep this under consideration when heading into this week's trading and continue to expect more whip-lash thanks to earnings and a slew of economic data reports, such as the new-home sales and consumer sentiment numbers.
Note: Unless otherwise stated, the index action described in this article relates to the E-mini futures contracts for the respective indices. Actual index action may differ slightly in terms of pattern formation, although the market bias will remain the same.
Toni Hansen is president and co-founder of the Bastiat Group, Inc., DBA Trading From Main Street. Toni is one of the most respected technical analysts and traders in the industry. She has been trading and educating new traders, money managers, professional market analysts and traders throughout the boom and bust of the last decade. She has worked in conjunction with some of the world's top financial exchanges. Learn more about Toni Hansen and the educational services she provides through her website at http://www.tonihansen.com.