Tuesday, April 14, 2009

Psychology Of The Market - Sellers Most Likely Motivated By Financials, Retail Sales

A very good but highly anticipated earnings report from GS helped to trigger some profit-taking after a big two-day run by financials. Banks were getting downright frothy on Monday as many expected a great Goldman report to keep things moving. The report was solid, but a secondary offering and a classic "sell the news" setup triggered profit-taking.

We ended up with about 2 to 1 negative breadth with oils and some commodity names showing the best relative strength. Semiconductors also held up fairly well as investors anticipate Intel earnings after the close tonight.

Intel has bounced strongly off the lows of March so it will be interesting, but there doesn't seem to be very high expectations. The reaction to this report will be a good test of the overall market psychology.

There has been a good amount of speculative fervor in some secondary groups like solar energy, bulk shippers and small-cap China stocks lately. That cooled off a bit after a strong start this morning, but I wouldn't take them off the radar screens quite yet.

Overall the market needs to consolidate at this point and can afford some profit-taking. Earnings season will provide the emotional drivers for our next move.

Keep an eye on Intel tonight. That is going to be a good clue in determining the level of expectations.

In more detail, sellers were probably motivated by financials and retail sales. Participants put an end to a three session streak of gains by sending stocks 2% lower Tuesday. The downward push came as financial stocks fell out of favor and disappointing retail sales data led some to second guess the prospects of retailers... Financial stocks weighed on the broader market for the entire session and finished with a 7.7% loss. The sector's weakness was widespread, but investment banks and brokerages (-10.7%) suffered some of the steepest declines after Goldman Sachs (GS 115.92, -14.23) announced a $5 billion common equity offering that was discounted from the prior session's closing price. The offering will also prove dilutive to existing shareholders, but is intended to help repay TARP funds... Goldman did manage to generate strong trading results, which helped it overcome weakness in its investment banking and consulting arm. That helped the company post better-than-expected earnings results... A better-than-expected earnings announcement and a reaffirmed outlook from Johnson & Johnson helped health care stocks fend off most of the session's selling effort, though shares of JNJ inevitably closed near their session low. Health care closed 0.3% lower, but was still the best performing sector this session... Due to widespread weakness, nearly 80% of the companies in the S&P 500 finished lower. Sellers were particularly unkind to small- and mid-cap stocks as the Russell 2000 fell 3.2% and the S&P 400 dropped 2.6%. Both indices posted declines in each of the past two sessions, but are still up 15.3% and 14.3%, respectively, in the past month... Shares of retailers fell 2.5% this session after data showed retail sales for March declined 1.1%, which is worse than the 0.3% increase that was expected. That caused a number of investors to second guess the recent run seen in retail stocks; retailers climbed more than 4% last week and almost 6% the week before... In other economic news, producer prices for March declined 1.2% month-over-month. Economists had expected the index to remain flat after a monthly increase of 0.1% in February. Core producer prices were flat month-over-month, which was relatively in-line with the 0.1% increase that was widely expected. February core PPI had increased 0.2% month-over-month... Meanwhile, February business inventories decreased 1.3%, which is generally in-line with the 1.2% decline that was expected. Inventories also decreased 1.3% in the prior month.

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