Good day! Tuesday was a day driven by news - mainly the latest earnings reports. This pushed the indices to new highs on the year. After retesting Monday's lows heading into midnight, the index futures turned higher in the early morning hours. This rally continued into 5:15 a.m. ET, but the move stalled until the U.S.'s morning data started to come in.
Among the strongest earning's gainers were Delta (DAL), Cummins (CMI), 3M (MMM), and IBM (+IBM). All of them posted better-than-expected results. Not all news, however, was good news. Coca-Cola (KO) missed both profit and revenue expectations. Its exposure in Japan was viewed as the main cause. Nevertheless, although lower than expected, its first-quarter profits still grew by 18%.
Dow Jones Industrial Average (Figure 1)
February was also another dismal month for the housing market, but this particular announcement comes as no surprise. According to the S&P/Case-Shiller index of home prices, home values were down 3.3% in February based on the average for 20 major metropolitan areas. Only Washington, D.C. has managed to see a an increase in home values over the past year, while Phoenix and Minneapolis were the hardest hit with losses topping 8%.
Overall home values are down 32% compared to the highs set in early 2006 with Phoenix being the hardest hit, down 56% off highs. After peaking that spring, prices fell for 36 months before bouncing slightly for a year. Since last summer, however, the decline has resumed and home prices are aiming for a retest of the low hit almost exactly two years ago. Distressed sales currently account for more than 30% of all home purchases.
The government made a lot of concessions to stem the decline several years ago, but with few incentives remaining to buy and mortgages more difficult than ever to obtain, real estate has a long road ahead of it before we can ever hope to see a decent recovery take hold. Despite widespread predictions of a bottom by next year, any real recovery is going to lag jobs growth, making it rather unlikely that we see much improvement in the year to come.
S&P 500 (Figure 2)
Although the market initially reacted with selling off premarket highs into the open and slightly beyond, the larger 15 minute trading range broke higher around 10:30 a.m. ET. The market then continued to climb throughout the remainder of the morning. The rally peaked heading into noon, which is a typical reversal period intraday. The price level at this point also corresponded to the measured move levels in the ES and NQ on the 15 minute time frame when the rally following the open is compared to the early-morning move. This is shown in blue in Figures 2 and 3 and is a strong resistance zone.
The Nasdaq faced the largest correction off mid-day highs. It pulled back into its opening price zone before finding support coming into the 14:00 ET correction period. Although the index recovered some of the loss ahead of the close, prices fell following the bell thanks to Amazon.com (AMZN). The online retailer reported an increase in revenue of 38%, but its earnings per share fell short of analysts' expectations.
Nasdaq Composite (Figure 3)
The Dow Jones Industrial Average ($DJI) ended the day a gain of 115.49 points, or 0.93%, and closed at 12,595.37 on Wednesday. Twenty-four of the Dow's thirty index components posted a gain. The top performers were Caterpillar (CAT) (+2.84%), Intel (INTC) (+2.46%), Cisco Systems (CSCO) (+2.46%), and Microsoft (MSFT) (+2.26%). The weakest were Bank of America (BAC) (-1.69%), Coca-Cola (KO) (-1.20%), and Home Depot (HD) (-0.93%).
The S&P 500 ($SPX) rose 11.99 points, or 0.9%, and closed at 1,347.24. The strongest percentage performers in the index were Waters Corp. (WAT) (+8.37%), Cummins Inc. (CMI) (+7.57%), AK Steel Holding Corp. (AKS) (+6.40%), and Illinois Tool (ITW) (+6.10%). The weakest were Lexmark Intl. (LXK) (-14.44%), Tellabs Inc. (TLAB) (-9.09%), Netflix (NFLX) (-9.04%), and Autonation Inc. (AN) (-4.35%).
The Nasdaq Composite ($COMPX) ended the session higher by 21.66 points, or 0.77%, on Wednesday and it closed at 2,847.54. The strongest performers in the Nasdaq-100 were Vertex Pharmaceuticals (VRTX) (+10.16%), Sigma Aldrich Corp. (SIAL) (+4.64%), Research In Motion (RIMM) (+3.29%), and Sears Holdings (SHLD) (+3.10%). The weakest were Netflix (NFLX) (-9.04%), Express Scripts Inc. (ESRX) (-2.20%), Alexion Pharmaceuticals (ALXN) (-1.92%), and Amazon.com (AMZN) (-1.68%).
Heading into Tuesday, one of the areas I was focused on was the commodities. Gold and silver were both showing signs of weakness heading into Monday's closing bell, leaving them "highly susceptible to rapid intraday selloffs" mid-week. Once such selloff took place immediately on Tuesday morning with prices falling sharply out of the opening bell. The remainder of the session, however, was slow as they digested the morning's decline.
Wednesday's focus will be upon the Federal Open Market Committee's announcement regarding their latest stance on interest rates. This two-day meeting began on Tuesday with the announcement due out on Wednesday afternoon.
It is common for the market to slow the day before a Fed meeting kicks off and this was seen throughout Tuesday afternoon. Recently, however, the actual announcement has not had as much of an impact on market price action as it has had in the years past. We will likely see this start to change once again towards the end of the year, but the reaction should remain relatively muted this month unless the indices climb slowly off early-morning lows ahead of the news. This would make a rapid selloff easy to accomplish. Although the market is showing some upside exhaustion, there is still room on the 60 minute charts for action either way and the intraday action leading up to the announcement will serve as better guidance than Tuesday evening's bearish congestion.
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.
