Excessive Run Up May Temper Market Optimism - RTTNews Daily Market Analysis

(RTTNews) - The major U.S. index futures are pointing to a lower opening on Thursday, with the weakness reflecting doubts over whether recovery expectations discounted by the markets are overly optimistic. Nevertheless, the markets may express some relief over the weekly jobless claims number that showed a decline in the recent reporting week. Some degree of comfort may also be expressed over M&A deal announcements. Nevertheless, traders may fear to increase holdings amid overbought market conditions and fluid economic conditions.

A strong global lead, helped by positive data points from some Asian nations, led to a positive start on Wall Street on Wednesday. After seeing a buying surge in early trading, the major averages pared back some of their gains, although they held above the unchanged line for the bulk of the session to close moderately higher.

While the Dow Industrials closed up 44.29 points or 0.43% at 10,291, the Nasdaq Composite advanced 15.82 points or 0.74% to 2,167 and the S&P 500 Index ended at 1,099, representing a gain of 5.50 points or 0.50%.

Twenty-six of the thirty Dow components closed the session higher, with Bank of America (BAC | Quote | Chart | News | PowerRating) (up 2.50%), Intel (INTC | Quote | Chart | News | PowerRating) (up 1.74%), Home Depot (HD | Quote | Chart | News | PowerRating) (up 1.83%), Wal-Mart Stores (WMT | Quote | Chart | News | PowerRating) (up 1.26%), Cisco Systems (CSCO | Quote | Chart | News | PowerRating) (up 1.14%) and DuPont (DD | Quote | Chart | News | PowerRating) (up 1.04%) leading the gains. However, Merck (MRK | Quote | Chart | News | PowerRating) receded 1.16%.

Among the sector indexes, the Dow Jones Transportation Average rose 1.81% and the NYSE Arca Airline Index climbed 2.74%, while the Dow Jones U.S. Basic Materials Average and Philadelphia Oil Sector Index gained a little over 1% each. The Amex Securities Broker/Dealer Index and the KBW Bank Index gained about 1.10% each.

In the technology space, the Philadelphia Semiconductor Index advanced 1.36%, the NYSE Arca Computer Hardware Index ended up 1.70%, the NYSE Arca Networking Index rallied 1.72% and the NYSE Arca Disk Drive Index moved up 1%.

Despite the S&P 500 Index breaking above the 1,100 mark in Wednesday's session, there wasn't enough momentum for the index to convincingly close above this key level. A break above this crucial level is important from the point of view of a continuation of the uptrend, while in the eventuality of the index failing, it could find support around the 1,080, 1,061 and 1,042 levels.

The Asia-Pacific region is showing signs of vibrancy, helped by aggressive monetary policy actions, large fiscal stimulus packages and the impact a Chinese recovery is having on other countries in the region. The region is benefiting from a return of the global economy towards normalcy following the abrupt collapse in global trade and finance at the end of 2008, which goes on to negate the theory that the Asian economies have decoupled themselves from the rest of the world.

Without robust import demand from the developed economies, it is unlikely that the Asian economies grow at the robust 6% clip witnessed for most of the past decade. Arguments that Chinese growth can offset the slackness elsewhere is untenable, as China is a relatively small importer of consumer goods and Chinese imports are very different from the imports to the developed economies. Many have now come to question the quality of growth in China, mainly regarding the risks posed by the extraordinary pace of loan growth, which has led to the multiplication of non-performing assets in the banking system.

World Bank President Robert Zoellick warned yesterday that the global economy faces downside risks in 2010 from rising unemployment levels. Additionally, Zoellick believes that asset bubbles in East Asia could undermine confidence. There is no denying of the fact that economic conditions still remain fluid and a sustainable recovery can not be taken for granted.

Back at home, lending support to the theory that the housing market is on the mend, RealtyTrac reported that foreclosure filings on U.S. properties declined 3% month-over-month in October, although they remained up 19% from the year-ago period. Foreclosure filings have seen monthly declines in each of the past three months. That said, we cannot throw caution to the wind, as homebuyers are still contending with unfavorable conditions such as high-risk mortgages, negative equity and high unemployment levels.

Currency, Commodity Futures

Crude oil futures are trading down $0.72 at $78.56 a barrel after rising $0.23 to $79.28 a barrel in Wednesday's session. In its monthly oil report, OPEC said world oil demand is likely to rise by 0.8 million barrels per day in 2010 following a 1.4 million barrels per day contraction in 2009, although it cautioned that a potential weak economic recovery may dampen potential demand growth in 2010.

The cartel expects oil to trade in the high $70s in the near future, with price direction likely to be impacted by economic and the U.S. dollar fluctuations.

After climbing $12.10 to $1,114.60 an ounce in the previous session, gold futures are edging down $0.10 to $1,114.50 an ounce. Gold has been receiving ample support of late from the falling dollar. The precious metal continued to climb on Wednesday, unfazed by comments from a top Chinese official that China would rather wait for price to fall to a relatively low level than buy at current levels. Since gold prices are unlikely to soften meaningfully, any dip should be used as a buying opportunity.

Among currencies, the U.S. dollar is trading at 90.16 yen compared to the 89.87 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at $1.4926.

Asia

Profit taking following four straight sessions of gains introduced weakness in most Asian markets on Thursday. After opening higher, most markets in the region erased their gains by the mid-session, closing lower.

After opening with a positive gap of 66.02 points, the Nikkei 225 average declined steadily throughout the morning session, dipping into negative territory just after the mid-session. Thereafter, the index continued to decline to close down 67.19 points or 0.68% at 9,805.

Export stocks, with the exception of some auto stocks, came under heavy selling pressure. Bank stocks also ended the session lower. However, utility and resource stocks saw some strength.

The wholesale price inflation report released by the Bank of Japan showed that Japan's corporate goods price index fell 0.7% month-over-month in October following flat pricing levels in the previous two months, with the decline mainly due to a drop in electricity rates. Annually, prices fell 6.7%, smaller than the 8% drop in the previous month. On a constant currency basis, export prices were down 0.4% compared to the previous month, while import prices edged down 0.1%.

After trading above the unchanged line for the bulk of the session, Australia's All Ordinaries retreated on a late hour sell-off. The index closed down 7.70 points or 0.16% at 4,758. Energy, material and utility stocks led the market lower in a session, when selling pressure was found across the board.

A report released by the Australian Bureau of Statistics showed that employment in Australia rose 245,000 in October, an unexpected increase, as economists had expected a loss of 10,000 jobs. At the same time, the jobless rate rose to 5.8% from 5.7% in the previous month.

Hong Kong's Hang Seng Index, which showed some indecision in the morning, moved decisively into negative territory in the afternoon to close down 229.64 points or 1.01% at 22,398. Financial, property, retail and resource stocks showed significant weakness.

Meanwhile, retail sales in New Zealand rose 0.1% in volume terms in the September quarter compared to the previous quarter, according to a report released by Statistics New Zealand. In the previous quarter, the gain was 0.5%. Meanwhile, total sales volumes rose 0.2% in September, slower than the 1.1% growth in August. Core retail sales remained unchanged in the month. Commenting on the data, Westpac said that consumer spending in New Zealand is increasing in a very measured pace.

Europe

After opening sharply lower on Thursday, most European averages have trimmed their losses and moved into positive territory. While the U.K.'s FTSE 100 Index is rising 0.10%, the German DAX Index and the French CAC 40 Index are gaining 0.03% and 0.15%, respectively.

On the economic front, the Bank of France reported that the French current account showed a deficit of 3.6 billion euros in September compared to a deficit of 4 billion euros in the previous month. The improvement was helped by a narrowing of the deficit in goods trade and a small increase in the services account surplus.

Eurozone industrial production fell 12.9% year-on-year in September compared to the 15.1% drop in the previous month, revised from the 15.4% fall estimated initially. Economists had expected a decline of 14.1%. On a monthly basis, industrial production dipped 0.3% compared to the 1.2% growth in the previous month.

Economic News

First time claims for unemployment benefits fell by more than expected in the week ended November 7th, according to a report released by the Labor Department on Thursday, although claims remain just above the 500,000 level.

The report showed that initial jobless claims fell to 502,000 from the previous week's revised figure of 514,000. Economists had been expecting claims to edge down to 510,000 from the 512,000 originally reported for the previous week.

First-time claims for unemployment benefits fell by more than economists had been anticipating in the week ended October 31st. Jobless claims fell to 512,000 from the previous week's revised figure of 532,000. Economists had been expecting jobless claims to edge down to 522,000 from the 530,000 originally reported for the previous week.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended November 6th at 10:30 AM ET. The release of the report has been delayed by a day due to the government holiday on Wednesday.

Crude oil stockpiles fell by 4 million barrels to 335.9 million barrels in the week ended October 30th, 2009. Notwithstanding the decline, inventory levels were near the upper limit of the average range.

Gasoline stockpiles edged down by 0.3 million barrels and remained above the upper limit of the average range, while distillate fuel inventories declined by 0.4 million barrels. Distillate stockpiles remained above the upper boundary of the average range. Refinery capacity utilization averaged 81.1% over the four weeks ended October 30th compared to 82.2% in the previous week.

The Treasury Budget, a monthly account of the surplus or deficit of the federal government is due to be released at 2 PM ET. The budget is considered an indicator of budgetary trends and the thrust of fiscal policy. Economists estimate a deficit of $162.5 billion for October.

Earnings

Wal-Mart (WMT | Quote | Chart | News | PowerRating) reported that its third quarter earnings from continuing operations came in at 84 cents per share, while sales rose 1.1% to $98.667 billion. The consensus estimates called for earnings of 81 cents per share on revenues of $99.88 billion. The company revised up its 2010 earnings per share continuing operations guidance to $3.57-$3.61 from its earlier estimate of $3.50-$3.60 per share. The company guided fourth quarter earnings to $1.08-$1.12 per share. Analysts estimate earnings of $1.12 per share for the fourth quarter and $3.58 per share for the year.

Kohl's (KSS | Quote | Chart | News | PowerRating) third quarter earnings rose to 63 cents per share from 52 cents per share last year. Revenues climbed 7% to $4.05 billion. Analysts estimated earnings of 61 cents per share on revenues of $4 billion. For the fourth quarter, the company expects sales growth of 3%-6% and earnings per share of $1.14-$1.24, while analysts estimate sales growth of 6.3% and earnings of $1.25 per share.

Stocks in Focus

Hewlett-Packard (HPQ | Quote | Chart | News | PowerRating) shares took a modest hit in Wednesday's after hours session after it announced that it has agreed to buy communication equipment maker 3Com. (COMS | Quote | Chart | News | PowerRating) for $7.90 per share or $2.7 billion. The decision is seen as an apparent move to take on Cisco Systems on its own turf.

HP also released its preliminary fourth quarter results, estimating earnings of 99 cents per share compared to 84 cents per share last year. On an adjusted basis, the company expects to earn $1.14 per share, which is above the consensus estimate of $1.12 per share. Revenues are expected to have declined 8% year-over-year to $30.8 billion compared to the mean analysts' estimate of $29.79 billion. The company also raised its 2010 revenue estimate to $118 billion to $119 billion from its earlier estimate of $117 billion to $118 billion, while it for forecast earnings of $3.65-$3.75 per share. Analysts estimate earnings of $3.81 per share on revenues of $113.39 billion.

Applied Materials (AMAT | Quote | Chart | News | PowerRating) could be in focus after it reported that its fourth quarter adjusted earnings of 13 cents per share compared to 3 cents per share in the year-ago period. However, sales declined 25% to $1.53 billion. The consensus estimates had called for earnings of 3 cents per share on revenues of $1.32 billion. The company expects its 2010 sales to increase by over 30%. Additionally, the company announced that it would eliminate 10%-12% of its global workforce as part of a restructuring exercise that will help the company to save $450 million annually.

Jamba (JMBA | Quote | Chart | News | PowerRating) may see some strength after it reported third quarter earnings of 4 cents per share compared to a loss of 23 cents per share last year. Total revenues fell 8.2% to $79 million.

SAIC (SAI | Quote | Chart | News | PowerRating) could move to the upside after it said it has been awarded a prime contract by the Air Force Center for Engineering and Environment to support environmental restoration, remediation and construction programs. The company noted that the contract has an eight year period of performance and a maximum value of $3 billion for all awardees.

CSC (CSC | Quote | Chart | News | PowerRating) could see weakness after it reported second quarter revenues that fell to $4 billion from $4.2 billion last year. The company's earnings were $1.40 per share, lower than $2.95 per share last year, which included a tax benefit of $2.27 per share. Analysts' estimates', which typically exclude one-time items, called for earnings of $1.35 per share on revenues of $4.01 billion. The company reaffirmed its 2010 guidance of $4.80-$5 per share in earnings and $16 billion to $16.5 billion in revenues. Analysts estimate earnings of $4.94 per share on revenues of $16.28 billion.

Advanced Auto Parts (AAP | Quote | Chart | News | PowerRating) receded in Wednesday's after hours session despite reporting third quarter earnings of 65 cents per share, higher than 58 cents per share last year. The company's adjusted earnings were 69 cents per share compared to the consensus estimate of 66 cents per share. Sales rose 6.3% to $1.26 billion, in line with the mean analysts' estimate.

KongZhong (KONG | Quote | Chart | News | PowerRating) may move in reaction to its announcement that its third quarter earnings rose 40% year-over-year to $35.1 million. The company reported non-GAAP net income of 16 cents per ADS. Analysts estimated earnings of 10 cents per share on revenues of $34.76 million.

Citrip.com (CTRP | Quote | Chart | News | PowerRating) could rally after it reported that its third quarter earnings rose to 2.65 yuan per share from 1.52 yuan per share in the year-ago period. On an adjusted basis, the company's earnings were 3.03 yuan per share or 44 cents per share, which beat the consensus estimate of 32 cents per share. Revenues climbed 47% to 583.4 million yuan or $85.5 million, exceeding the $72.2 million mean analysts' estimate. For the fourth quarter, the company expects revenue growth of 25%-30%.

Cantel Medical (CMN | Quote | Chart | News | PowerRating) may see some buying interest after Standard & Poor's announced that the company would replace NATCO Group (NTG | Quote | Chart | News | PowerRating) in the S&P SmallCap 600 Index, as NATCO has agreed to be acquired by Cameron International (CAM | Quote | Chart | News | PowerRating). Additionally, Calavo Growers (CVGW | Quote | Chart | News | PowerRating) is also likely to gain ground, as it will be replace Sterling Financial (STSA | Quote | Chart | News | PowerRating) in the S&P SmallCap 600 Index.

Choice Hotels (CHH | Quote | Chart | News | PowerRating) could be in focus after it said it has signed a 3-year agreement with Expedia (EXPE | Quote | Chart | News | PowerRating) to include Choice Hotel's properties on more than 80 Expedia and Hotels.com branded sites that Expedia operates worldwide.

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