NEWS: The Dow closed the session with its best one-day point gain since
4/1. The closing numbers showed a gain of 276 points or 2.5%. The
S&P rallied 30 points or 2.5% and the NASDAQ exploded for a gain of
69 points or 3.1%. The leader on the day was the Russell 2000 with a
gain of 3.7%. Technically the index rallied from triple bottom and is
the most attractive of the major indices.
THE BOTTOMLINE: The big news today came from the fifth largest bank in
the US, Wells Fargo (NYSE: WFC), which beat earnings estimates. But the
big surprise was the fact they raised their dividend. Yes, I said
raised! I think if you took a poll of analysts before today’s earnings
release the overwhelming majority would have predicted a dividend cut
versus a dividend raise.
The very fact WFC raised their dividend does not affect me directly at
all. But indirectly it affects all investors because there is no way
WFC would take the risk of raising their dividend if they thought there
was a liquidity issue and lowering the dividend was a possibility in
the near future. Therefore, the actions of WFC today are the reason the
market rallied like it did and the KBW Bank Index rose 17%. If you own
the bank stocks you can celebrate today, but the index is still lower
by 35% for the year, even after the rally.
Tomorrow before the bell there are more financial stocks reporting, including JPMorgan Chase (NYSE: JPM).
BOTTOM OR OVERSOLD BOUNCE?
NEWS: Today’s 2%-3% rally for the US indices was a well needed bounce,
but was it just that, a bounce? Or can today’s action be viewed as the
first signal of a bottom.
THE BOTTOMLINE: As great as today’s bounce was for the major indices,
it was not the broad-based rally I was looking for to mark the bottom.
A number of the 2008 leaders took big hits today (see commodities,
utilities, agriculture, etc.), suggesting the big move was merely a
rotation of money back into the beaten down sectors such as financials,
homebuilders, and airlines.
The market internals improved greatly today with the advancers
outpacing the decliners by a 3-to-1 margin, but I would have expected
better with the big gains. Up volume actually lagged down volume on the
NYSE, a surprising figure. Overall the market did not have the “rally
from a low” feeling to me; this may just be the air in my office, but I
did not see money flowing into all sectors of the market - which is
needed for a sustainable rally.
I do not know how to calculate this number on the fly, but if the gains
of the financials were removed from today’s closing numbers, what would
the gains have been for the indices? Considering the gains of the Dow
financials today: BAC +22%, JPM +16%, C +13%, AIG +13%, AXP +13%. The
point I am trying to make is that we would prefer not to have a big
rally that is so dependent on one sector of the market. For today to
eventually result in a market bottom, there needs to be more
participation from other sectors, thus resulting in a broad-based
market rally that turns into a bull market that is sustainable.
THE DAILY ETF UPDATE - EVEN THE LOSERS GET LUCKY SOMETIMES
NEWS: The list of the top performers today look was almost identical to
the list of the worst performers for the year. Financials,
homebuilders, REITs, and retail led the move higher today.
THE BOTTOMLINE: The market had one of its best days in weeks and the
charge higher was led by the laggards of the 2008 bear market. Today’s
rally in the ETFs that are related to the beaten down sectors should
not be a signal to run out and throw money at them. Take HOLDRS
Regional Bank ETF (AMEX: RKH) as an example; the ETF was up 17% today
and is still down 1.6% for the month of July and lower by 32% for the
year. If you bought yesterday, RKH was a great purchase, but if you
bought heading into 2008 or even last month, you would still be way
under water.
The point I am trying to make is that 99% of the investors that read
this commentary are not trading for one day and therefore should not
base a decision on the action of a single trading session. Remember
that one day does not make a market.
