Another Battle Begins
11:00pm (EST)
Earnings season officially got underway last week and so far it favors the bears going forward. There were a number of “surprises”, some good/ some bad, but the overall theme is companies are having no problems beating lowered expectations but they aren’t doing Jack with growing their revenues. We covered quite a few companies last week so we will look at who said what on Friday.
The market plunged on the last day of the week on disappointing economic data and from the Financial sector which was blasted for a loss of 3%. The bears were punishing the market right from the open and continued to pour it on after hearing the Reuters/University of Michigan consumer confidence index report. The index fell to 66.5 in July, down from 76 in June. Needless to say, Wall Street’s pencil pushers did not figure a 9.5 point drop and the bears used it as extra ammo.
Elsewhere, the Labor Department chimed in and said the seasonally-adjusted Consumer Price Index slid 0.1% in June. Core consumer prices were up 0.2%. In May, consumer prices were down 0.2%.
Turning to earnings, Bank of America (BAC, $13.98, down $1.41) and Citigroup (C, $3.90, down $0.26) tanked 9% and 6%, respectively. Both companies posted better-than-expected earnings per share but revenue fell short of expectations.
Bank of America reported a profit of $3.1 billion, or $0.27 a share, versus $3.2 billion, or $0.33 a share, in the year earlier period. The Street was expecting $0.22 a share. Revenue came in at $29.5 while analysts were expecting $29.8 billion.
Citigroup said its earnings were $2.7 billion, or $0.09 a share, compared to $4.3 billion, or $0.49 a share in last year’s quarter. Analysts had estimates of $0.05 cents a share. Revenue was $22.1 billion which was slightly below the $22.2 billion call.
We mentioned in our 1pm update on Friday when the market was down about 2% we could see more selling pressure and a possible 3% clip. On average, we were close. The Dow fell 261 points, or 2.5%, to settle at 10,097 and below its 10 and 20-day moving averages (MA). For the week, the index dropped 100 points, or 1%, and could not bust through the 10,400 level.
The S&P 500 plunged 32 points, or 2.9%, to settle at 1,064 and below its 50-day MA. The index was unable to penetrate the 1,100 level which is looking like a concrete wall. For the week, the index declined 13 points, or 1.2%.
The Nasdaq suffered the worst losses as it got hammered for 70 points, or 3.1%, to finish at 2,179. The Tech-rich index was down 17 points, or 0.8%, for the five trading days but the 200-day MA of 2,250 will likely keep the bulls in check over the near-term.
Downside targets in play this week will be Dow 10,000 then 9,800. The S&P could be headed for a break below 1,050 which could lead to 1,020. Meanwhile, watch for the Nasdaq to test 2,150 then 2,050. If these levels fail once again then we could finally see the bears do some real damage.
Looking ahead to this week, there will be an overload of earnings news and we could get aggressive on our trades as we see a number of opportunities to go short this market. We know this trading range has been tough for a lot of investors but we strongly feel another test to the downside is imminent.
Two keys things we are watching that will keep the bulls at bay are the Financials, which look nasty right now, and what is revealed in Europe’s bank stress tests this week.
At some point in 2010, we can see a breakout to the upside for the market but we think a “cleansing” is still needed before investors feel like they are getting a bargain on stocks. (Although Bank of America looks interesting at $14 right now).
We will be back in the morning with a full update on the companies reporting and maybe a possible trade or two.
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