Despite concerns that China was again going to tighten lending
conditions, on Friday, financial stocks led the U.S. market to the
highest level in two and a half years. It was the seventh
consecutive weekly gain for the Dow Jones Industrial Average. The
strongest groups were financials, energy and technology.
With the banks leading the financial group,
JPMorgan Chase & Co.
) rose 1% following a Q4 earnings gain that exceeded analysts'
expectations. Bank of America (NYSE: BAC) rose 3.3%, and
PNC Financial Services
) was up 5.1%. And regional banks rose as well, with
) gaining 3.39% and its rival
) rising 2.01%.
) rose 2.9% after saying that it was a candidate for a buyout.
PHLX Semiconductor Index
) leapt 2.7% to a three-year high following an earnings report by
). The company exceeded earnings estimates, but the stock fell 1%
after comments by analysts that it would have a tough time in the
future due to a downturn in computer sales. Intel rose earlier in
the week in anticipation of higher earnings, so despite the decline
on Friday, it netted a gain of 2% for the week.
Economic news on Friday was mixed. The consumer price index
(CPI) for December rose 0.5% versus an estimate of 0.4%. But the
preliminary consumer sentiment survey by the University of Michigan
for January came in at 72.7, below the anticipated 75.5. Retail
sales for December increased 0.6%, which was also lower than
expected. U.S. business inventories had a smaller-than-expected
rise, and industrial production was up 0.8% versus an estimated
Treasurys lost ground on Friday. The 10-year note's yield rose
to 3.334%, and the 30-year bond closed at 4.524%. The euro was
slightly higher at $1.3375, up from $1.3351 on Thursday.
At Friday's close, the Dow rose 55 points to 11,787, the S&P
500 gained 9 points at 1,293, and the Nasdaq was up 20 points at
2,755. The NYSE traded 1.1 billion shares with advancers ahead by
1.4-to-1. The Nasdaq crossed 515 million shares and advancers were
ahead by 1.8-to-1. For the week, the Dow rose 1%, the S&P 500
gained 1.7%, and the Nasdaq was up 1.9%.
Crude oil for delivery in February gained 14 cents to $91.54 a
Energy Select Sector SPDR
) rose 75 cents to $70.65. Gold fell to a seven-week low with the
February contract settling at $1,363, off $24. The
PHLX Gold/Silver Sector Index
) fell to 205.72, down $3.02. Support for the XAU rests at about
What the Markets Are Saying
Despite sentiment and internal indicators that are overbought on
a daily and weekly basis, the market continues to plough ahead.
Mark Arbeter, chief technical analyst at S&P, appears
confounded, saying, "The stock market continues to creep higher, as
if propelled by some mysterious force that keeps the daily ranges
And Mark warns of a pending 38.2% or 61.8% Fibonacci retracement
of the August lows, which, if the market reversed now, would take
the S&P 500 down to 1,190, and then the 1,130 area.
Since the end of December, I've been cautioning our readers
about the overbought condition of the market. At the same time,
I've noted that as long as the trend is up, we should hold the
stocks that we own. But recently, I've advised that a very cautious
approach be considered for new positions. I believe that despite
the statistical probabilities of a pending pullback, the timing of
it is almost impossible to predict, so it's best to ride it out
until a clear reversal occurs.
Those who have been in the market a long time know that markets
have a mind of their own, and low-volume markets are especially
susceptible to extended bull runs followed by very sharp
corrections. The current run quickly vaulted the indices well above
the initial targets that I set out in mid-December. You may
remember that they were Dow 11,785, S&P 500 1,278, and Nasdaq
2,700 to 2,710. At that time, the Dow was at around 11,500.
To review, longer term I "guestimated" that before the end of
the year, the following targets would likely be attained: Dow
12,800, S&P 500 1,400, and Nasdaq 3,700.
Here is how the numbers work: For the Dow, the top of April/May
was the close at 11,205 minus the July low 9,686 = 1,519 + 11,261
breakout on Nov. 4 = 12,780 rounded to 12,800. That number also
matches the resistance zone highs of January to July 2008. The same
approach was used for the S&P 500.
But the Nasdaq is different. That index is much more prone to
great over-runs that result in huge price/earnings multiples.
Consider the dot-com bubble, which ran the S&P to an average
p/e of over 120 times earnings and vaulted the Nasdaq to 5,048.62.
Many tech stocks having never reported profits sold in the $50s and
big-name stocks like
) shot to 200 times earnings. The top was made on March 10, 2000,
when the index sold for more than twice its value of 12 months
before. But a year later, it was down to just 40% of the peak.
Could it happen again? In my opinion, it's highly unlikely that
stocks will become so overbought in my lifetime. But it won't be
long before many investors will have no memory of such chaos,
having been too young to remember. And even those who did live
through it may blot out painful moments as the excitement of quick
profits overwhelms the markets.
Tomorrow I'll cover why I think that Nasdaq has a strong
possibility of reaching 3,700 in 2011.
For one tech to sell now, see the
Trade of the Day
Today's Trading Landscape
To see a list of the companies reporting earnings today,
For a list of this week's economic reports due out,
If you have questions or comments for Sam Collins, please
e-mail him at