Market Report – July 30, 2012

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In The Rear View Mirror:

When the week started, if most investors had known that marquee stocks such as UPS (NYSE: UPS), Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and Starbucks (NASDAQ: SBUX), just to name a few, would deliver disappointing earnings reports the logical assumption would have been that the broader market would decline.

Mix in more uninspiring economic data, and most folks would have said stocks definitely would have declined. That was not the case.

Market up three weeks in a row

Far from it actually as the S&P 500, Dow Jones Industrial Average and the Nasdaq also closed sharply higher on the week. More importantly, the three major U.S. indexes have eclipsed their May highs and closed to the upside for three consecutive weeks.

Friday’s volume was 7.54 billion shares on the New York Stock Exchange, the Nasdaq and the Amex, compared with the year-to-date daily average of 6.75 billion shares, according to Reuters.

Two prime market drivers

The catalysts for the week’s ebullient tone were familiar. European Central Bank chief Mario Draghi said he will do everything he can to save the downtrodden euro. That combined with speculation the Federal Reserve will engage in more monetary easing following another disappointing GDP reading was enough to lift stocks higher.

On Friday, the Commerce Department said U.S. GDP grew at a rate of 1.5% in the second quarter, down from 2% in the first quarter. Economists expected a second-quarter reading of growth of 1.4%.

The Markets @ 7/27/2012
Index Close Weekly % Change YTD Change YTD%
DJIA 13075.66 253.09 1.97% 858.1 7.02%
NASDAQ 2958.09 32.79 1.12% 352.94 13.55%
S&P 500 1385.97 23.31 1.71% 128.37 10.21%
NYSE Comp 7912.17 152.58 1.97% 435.14 5.82%
NYSE Amex 2385.43 4.71 0.20% 107.09 4.70%
RUS 2000 796 4.46 0.56% 55.08 7.43%
VANG INTL 13.63 0.27 2.02% 0.57 4.36%
USX CHINA 3984.46 39.55 1.00% -545.34 -12.04%
EMERG MKTS 6256.26 28.94 0.46% 250.95 4.18%

 

Market Report

The glum economic news did not end there. The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment slid to72.3 in July from 73.2 in June. Economists expected a July reading of 72.

As we’ve already mentioned, companies have not exactly set the world on fire and previews for the third quarter are nothing to write home about, either. With just over 10% of the S&P 500 companies having offered up third-quarter guidance, the negative-to-positive ratio for the third quarter stands at 5 to 1, the most negative since the second quarter of 2001, according to Thomson Reuters data.

All that and the Dow still closed at its highest point since early May.

In other words, the trend for the broader market is running counter to what the data and earnings reports indicate the market should be doing. Basically, stocks are going up because of expectations and hopes for central banks to act. Anyone that has a few years experience trading and investing knows that hope is a dangerous tonic. However, fighting obvious trends can crush one’s brokerage accounts.

Major Market Indexes Closed Strong on Friday and for the Week

Led by the Dow and NYSE, both up 1.97% for the week, the S&P 500 up 1.71% and the Nasdaq which gained 1.12%… the major indexes responded positively.

Market fundamentals, including earnings, are mixed, but hope for stimulus is high now, says Michael Yoshikami, chief executive officer of Destination Wealth Management. “QE3 is coming,” he adds. Indeed, there is a strong dread among institutional investors in particular of being out of the market ahead of such easing moves. (Barrons.com)

The US Dollar backed up slightly against the Euro (closing at 0.8117 Euros, -0.0107); the 10-year bond closed at $101.844 (- $0.828) and the 30-year bond followed suit; -$1.844 to close at $107.625.

WTI Crude Oil softened somewhat… down $1.31 for the week…closing at $90.13 a barrel.

Of course gold moved up this week…the sea saw was due to move in the opposite direction

Up $35.40 for this week to close at $1,617.90; and back above the major support level of $1600. The 30-day trading range has been 1555 to 1625…not terribly exciting.

The USX China Index reversed its downward trend and gained 1.00% this week but is still off 12% YTD…as we reported in our last issue… it is the only index we follow that is flashing big red numbers.

The Bottom Line for Stocks

While it is right to remain leery of the current trend, it would also be unwise to ignore it altogether.

After all, the stock market is a forward looking indicator while economic indicators are not. So that implies the market may be pricing in improved earnings and economic data that will arrive later this year or early next. Obviously, there are no guarantees those scenarios will come to pass, but the scenarios are possible nonetheless.

We remain constructive on biotechnology and that thesis was born out this week on the large-cap side of the ledger, but micro-caps were seen getting in on the act. One microcap biotech that we are keeping on our radar is CytoSorbents (OTCBB: CTSO) which we first covered on June 20th. Click here to review our initial report: http://microcapmarketplace.com/2012/06/20/cytosorbents-the-next-great-medical-device-growth-story-i-say-yes/

Another positive trend is the resurgence of emerging markets equities, which indicates risk appetite could be seeping back into the market. Our Emerging Markets index showed a little strength…up 0.46% for the week and 4.18% YTD.

On the microcap front, the Russell 2000 gained 0.56% last week and is up close to 7 1/2% for the year. Our latest microcap stock, Craft Brew Alliance (Nasdaq: BREW), is up 3.7% in the last 10 days…click here for that coverage: http://microcapmarketplace.com/2012/07/16/have-a-cold-one-with-craft-brew-alliance-a-hot-microcap-growth-story/ .

Research and Editorial Staff
MicroCap MarkePlace

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