Tuesday, May 19, 2009

Stalled Out Or Building A Base? Tough To Tell Today In The Choppy Trading

The market finished poorly and the indices didn't do much at all, but breadth was pretty good and there was a lot of small-cap momentum under the surface. Although the Memorial Day holiday is still a few days off, it felt like fairly typical holiday trading where the traders pushed a number of stocks in rather euphoric fashion.

The hottest action today was in small-cap China, solar energy, fertilizers, some bulk shippers, select gold and metals and some energy stocks. Weakness was in the financials and retailers, which was why the senior indices lagged.

Even with the pockets of momentum there was some very choppy action. I was looking for this sort of action yesterday, but the bulls got the short squeeze going so we ended up with the consolidation-type action today at a higher level.

The question now is whether the market stalls out or just continues to base out a bit. The speculative action is a good sign: You don't see that sort of trading when folks are anxious to hit the exits.

On the other hand, we saw last week what happens when the small-cap momentum fizzles out. It slowed on Monday and Tuesday and we fell hard on Wednesday. We'll have to watch for that cycle to play out again.

Hewlett-Packard earnings are out after the close and although they look to be mostly in line, the stock is trading down on the news.

Going into more detail, a late selling effort caused stocks to close a choppy session in mixed fashion. The session's lack of direction followed disappointing housing data and a pullback by financial stocks... News that housing starts and building permits recently fell below expectations jostled participants in the early going and undermined what was a positive bias ahead of the opening bell. Housing starts during April came in at an annualized rate of 458,000, while building permits for April hit a rate of 494,000. Both marked record lows... However, there is a silver lining to the report. Fewer housing starts and building permits means there will be fewer homes on the market, which should help clear the glut of existing homes and improve pricing... Contrasting its performance in the prior session, financials were the worst performing sector in the S&P 500. They finished 2.6% lower amid weakness in consumer finance stocks and banking stocks... Consumer finance companies (-4.8%) saw their shares come under increased pressure following news that the Senate has passed legislation to place new restrictions on the credit card industry. Dow component American Express showed particular weakness, even though the company announced plans to save $800 million this year by slashing jobs, investments, and costs... Diversified banks dropped 4.9% as participants shrugged off news that the Fed has expanded collateral eligible under its TALF to include high-quality commercial mortgage-backed securities in order to ease balance sheet pressures. The Fed's announcement was made in the wake of a report from The Wall Street Journal that suggested commercial real-estate loans could generate $100 billion in bank losses by next year... Meanwhile, CNBC reported that TARP repayment announcements will not be made until after June 8, and that the Treasury will announce a process for auctioning TARP warrants in the next several days... On a similar note, Financial Times reported that Britain has begun talks with sovereign wealth funds and other investors about selling stakes in its part-nationalized banks... Health care stocks also traded as laggards. They finished with a 0.6% loss, though ABC showed strength after it announced better-than-expected earnings, raised its guidance, hiked its quarterly dividend by 20%, and issued a 2-for-1 stock split... There weren't many earnings reports for participants to assess this session. However, Dow component HD did post better-than-expected earnings for the latest quarter. That wasn't enough to win the company favor among participants, though. The stock surrendered nearly all of its gains from the prior session, and traded as a laggard among retailers, which finished the session 0.3% higher... Utilities made up the best performing sector by finishing 1.7% higher. The strong performance followed a flat finish in the prior session, and losses in the three preceding sessions. Only a handful of companies are scheduled to announce earnings results ahead of tomorrow's opening bell. The minutes from the FOMC's April 29 meeting are due at 2:00 PM ET and should help provide investors with details regarding the Fed's quantitative easing efforts...

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